Thomas E Rubin v. United States of America

NOTICE OF MOTION AND MOTION to Dismiss Case Defendant's Notice of Motion and Motion for Judgment on the Pleadings Under Fed. R. Civ. P. 12

C.D. Cal.August 26, 2016

1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 EILEEN M. DECKER United States Attorney ROBERT CONTE Assistant United States Attorney Acting Chief, Tax Division BENJAMIN L. TOMPKINS (SBN 305024) Assistant United States Attorney Federal Building, Suite 7211 300 North Los Angeles Street Los Angeles, California 90012 Telephone: (213) 894-6165 Facsimile: (213) 894-0115 E-mail: benjamin.tompkins@usdoj.gov Attorneys for Defendant United States of America UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION THOMAS E. RUBIN, Plaintiff, vs. UNITED STATES OF AMERICA, Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. 2:16-cv-02567-RGK-JPR Defendant’s Notice of Motion and Motion for Judgment on the Pleadings Under Fed. R. Civ. P. 12(c); Memorandum of Points and Authorities in Support Thereof [Proposed] Order Attached Hon. R. Gary Klausner Hearing: Sept. 26, 2016 at 9:00 a.m. Courtroom 850 Edward R. Roybal Fed. Building & U.S. Courthouse 255 E. Temple St. Los Angeles, CA 90012-3332 Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 1 of 22 Page ID #:409 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PLEASE TAKE NOTICE that Defendant United States of America, pursuant to Fed. R. Civ. P. 12(c) of the Federal Rules of Civil Procedure, hereby requests that the Court enter judgment on the pleadings and dismiss Plaintiff Thomas E. Rubin’s complaint for failure to state a claim upon which relief may be granted. This motion is based upon this notice and the complete files and records of this action, and the attached memorandum of points and authorities. On July 21, 2016, in accordance with Local Rule 7-3, undersigned counsel for the United States conducted a teleconference with Plaintiff. The parties were unable to resolve their respective differences regarding the allegations raised in Plaintiff’s complaint and the issues in this motion. Finally, please take notice that this matter will come on for hearing on September 26, 2016 at 9:00 a.m., or as soon thereafter as the matter may be heard by the Honorable R. Gary Klausner, United States District Court Judge, in Courtroom 850, located at Edward R. Roybal Federal Building and United States Courthouse, 255 E. Temple St., Los Angeles, CA 90012-3332. Respectfully Submitted, EILEEN M. DECKER United States Attorney ROBERT CONTE Assistant United States Attorney Acting Chief, Tax Division Dated: August 26, 2016 /s/ BENJAMIN L. TOMPKINS Assistant United States Attorney Attorneys for Defendant United States of America Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 2 of 22 Page ID #:410 i 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF CONTENTS MEMORANDUM OF POINTS AND AUTHORITIES ................................ 1 I. Introduction ........................................................................................... 1 II. Factual Allegations and Procedural History ......................................... 2 A. Plaintiff’s original 1998-2000 tax returns .................................. 2 B. Focus’ litigation and involuntary bankruptcy ............................ 2 C. Plaintiff’s amended 1998 through 2001 tax returns ................... 3 III. Argument .............................................................................................. 6 A. Refund overview ........................................................................ 7 B. Subchapter S Corporations ......................................................... 7 C. Plaintiff’s 1998-2000 refund claims should be dismissed since his claims are inconsistent with Focus’ 2000 return .................. 8 1. Plaintiff lacks standing to file a return on behalf of Focus ................................................................................ 8 2. Plaintiff’s Statement of Inconsistency for 2001 does not save his 1998, 1999 and 2000 refund claims ................. 11 D. Plaintiff cannot establish that he is entitled to deduct Focus’ cancellation of debt income ...................................................... 12 CONCLUSION ............................................................................................. 14 Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 3 of 22 Page ID #:411 ii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Table of Authorities Cases Ala. By-Prods. Corp. v. Patterson, 258 F.2d 892 (5th Cir. 1958) .................................................................................................. 13 Alon Int’l v. United States, 910 F. Supp. 233 (W.D. Pa. 1995) ......................................................................................... 10 Bird v. United States, 534 F.2d 1214 (6th Cir. 1976) ................................................................................................ 13 Borton & Sons v. United States, No. NO: 12-CV-3132-TOR, 2013 U.S. Dist. LEXIS 47739 (E.D. Wash. Apr. 2, 2013) ...... 10 Bufferd v. Commissioner, 506 U.S. 523 (1993) ................................................................................................................. 7 Catalano v. Commissioner, 240 F.3d 842 (9th Cir. 2001) .................................................................................................... 8 Comm'r v. Fink, 483 U.S. 89 (1987) ................................................................................................................... 7 Ding v. Commissioner, 200 F.3d 587 (9th Cir. 1999) .................................................................................................... 8 Durando v. United States, 70 F.3d 548 (9th Cir. 1995) ...................................................................................................... 8 Edwards v. Cuba R. Co., 268 U.S. 628 (1925) ................................................................................................................. 7 Focus Media, Inc. v. NBC (In re Focus Media, Inc.), 378 F.3d 916 (9th Cir. 2004) .................................................................................................... 2 Gitlitz v. Comm'r, 531 U.S. 206 (2001) ............................................................................................................. 5, 9 Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542 (9th Cir. 1989) .................................................................................................. 6 Martinez v. United States, 595 F.2d 1147 (9th Cir. 1979) .......................................................................................... 12-13 Nelson v. City of Irvine, 143 F.3d 1196 (9th Cir.) ........................................................................................................... 6 Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 4 of 22 Page ID #:412 iii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NLRB v. Better Bldg. Supply Corp., 837 F.2d 377 (9th Cir. 1988) .................................................................................................. 12 O'Neill v. Commissioner, 271 F.2d 44 (9th Cir. 1959) .................................................................................................... 12 Quarty v. United States, 170 F.3d 961 (9th Cir. 1999) .................................................................................................. 12 Randle v. United States, No. CV 99-7992-CBM(RZx), 2000 U.S. Dist. LEXIS 13591 (C.D. Cal. July 31, 2000) ...... 13 Ratcliff v. Mckeever, No. 83 Civ. 6896 (MEL), 1984 U.S. Dist. LEXIS 22846 (S.D.N.Y. Oct. 11, 1984) ............. 10 Taproot Admin. Servs. v. Comm'r, 133 T.C. 202 (2009) ................................................................................................................. 7 Taylor v. San Bernardino County Deputy Sheriffs, 2012 U.S. Dist. LEXIS 184813, at *12 (C.D. Cal. Nov. 29, 2012) .......................................... 3 United States v. Dalm, 494 U.S. 596 (1990) ................................................................................................................. 6 United States v. Sullivan, 522 F.3d 967 (9th Cir. 2008) ................................................................................................ 2-3 Westlands Water Dist. v. Firebaugh Canal, 10 F.3d 667 (9th Cir. 1993) ...................................................................................................... 6 Federal Statutes 11 U.S.C. § 727(a)(1) (2012) ............................................................................................. 5, 10, 12 26 U.S.C. § 108(a)(1)(B) (2012) .................................................................................................... 5 26 U.S.C. § 172(c) (2012) ........................................................................................................... 3,4 26 U.S.C. § 1361(a)(1) (2012) ....................................................................................................... 7 26 U.S.C. § 1362(a) (2012) ............................................................................................................ 7 26 U.S.C. § 1363(a) (2012) ............................................................................................................ 7 26 U.S.C. § 1367(a)(1)(A) (2012) ................................................................................................. 7 26 U.S.C. § 1367(a)(2) (2012) ....................................................................................................... 7 26 U.S.C. § 6012(b) (2012) ................................................................................................. 1, 8, 11 26 U.S.C. § 6036 (2012) ................................................................................................................ 8 26 U.S.C. § 6037 (2012) .................................................................................................. 1, 2, 8, 10 26 U.S.C. §§ 118, 1016(a)(1), 1371(a) (2012) ............................................................................... 7 Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 5 of 22 Page ID #:413 iv 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 28 U.S.C. § 1346(a)(1) (2012) ....................................................................................................... 6 FEDERAL REGULATIONS 26 C.F.R. § 1.118-1 (2014) ............................................................................................................ 7 26 C.F.R. § 301.6402-2(b)(1) (2014) ........................................................................................... 13 Federal Rules Fed. R. Civ. P. 12(c) .......................................................................................................... 1, 2, 1, 6 Fed. R. Evid. 201 ........................................................................................................................... 3 Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 6 of 22 Page ID #:414 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 MEMORANDUM OF POINTS AND AUTHORITIES I. Introduction Pursuant to Fed. R. Civ. P. 12(c), this Court should enter a judgment on the pleadings and dismiss Plaintiff Thomas E. Rubin’s complaint. Plaintiff’s complaint is based entirely on his ability to file amended 1998, 1999 and 2000 personal income tax returns relying upon an amended 2000 “pro forma” tax return (Form 1120S) for Focus Media, Inc.1 As a subchapter S corporation, Focus’ income and losses flowed through to its sole shareholder, Plaintiff. However, in October 2000, Focus’ creditors filed an involuntary bankruptcy on its behalf. As a result, in accordance with 26 U.S.C. § 6012(b)(3), the Bankruptcy Trustee (“Trustee”) was the only person authorized to prepare and file returns for Focus, including any amended returns. In the 2000 return filed by the Trustee, he did not include cancellation of indebtedness income or claim the bad debt losses relied upon by the Plaintiff. Attempting to usurp the trustee’s authority, Plaintiff filed amended income tax returns relying upon a “pro forma” return he prepared for Focus claiming cancellation of indebtedness income, losses and deductions that he believed Focus should take. Indeed, Plaintiff admits in his complaint that this “pro forma” return was not reflected in the 2000 return filed by the Trustee. Because Plaintiff’s amended 2000 tax return (and the reliance upon a net operating loss for this year he attempts to carryback to his 1998 and 1999 tax years) was inconsistent with the 2000 return filed by Focus, Plaintiff’s refund claims for tax years 19998 through 2000 are barred under 26 U.S.C. § 6037(c), since allowing such refunds would violate the rule of consistency. See 26 U.S.C. § 6037(c). As a result, this Court should dismiss Plaintiff’s complaint. 1 In the context of a tax return, the phrase “pro forma” is generally understood to mean a return prepared on a “what if” basis using projected income and expenses to see what the tax ramifications of a hypothetical planning scenario would be. In this case, disagreeing with the 2000 1120S filed by the Trustee, Plaintiff prepared and include a “pro forma” return to justify his refund claims. Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 7 of 22 Page ID #:415 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 II. Factual Allegations and Procedural History The facts below are taken from the complaint, which the United States accepts as true and accurate only for the purpose of this motion to dismiss. On April 14, 2016, Plaintiff filed suit seeking a refund of over $10 million paid towards his 1998 through 2000 tax liabilities. Specifically, Plaintiff contends that the Trustee failed to include more than $90 million in deductions that would create over $47 million in losses that flowed from Focus, an S corporation that Plaintiff was the sole shareholder for, to him. [Dkt. 1 at ¶¶ 4-9; Dkt. 1-1, Ex. C at 79-83 (Attachment to Plaintiff’s 2000 amended tax return).] A. Plaintiff’s original 1998-2000 tax returns In accordance with 26 U.S.C. § 6037(c), returns for an subchapter S Corporation (“S Corporation”) and its shareholders (in this case Plaintiff as the sole shareholder) must be filed consistently. Following this rule, Plaintiff filed a federal income tax return for 2000 that reported a gain on sale of stock of Focus in the amount of $30,379,112. [Dkt. 1-1, Ex. C at 82.] In connection with filing Plaintiff’s 2000 return, Plaintiff paid, including withholdings, more than $7 million. [Dkt. 1 at ¶ 34; Dkt. 9 Am. Ans. to ¶ 34.] Similarly, Plaintiff filed his 1999 return and paid, including withholdings, more than $3.7 million. [Dkt. 1 at ¶ 27; Dkt. 9 Am. Ans. to ¶ 27.] Plaintiff also filed his 1998 return and paid, including withholdings, more than $3.3 million. [Dkt. 1 at ¶ 20; Dkt. 9 Am. Ans. to ¶ 20.] B. Focus’ litigation and involuntary bankruptcy Focus’s clients retained it to place radio and television advertising. [Dkt. 1 at ¶ 10.] During 2000, Focus’ largest customers filed suit against it related to business practices. [Id.] In this litigation, the California Superior Court enjoined Focus from collecting the account receivables owed it by Sears, Roebuck and Company, Universal and Dreamworks. [Id.] This injunction “essentially” put Focus out of business. [Id.; see also id. at ¶ 12.] Thereafter, in October 2000, Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 8 of 22 Page ID #:416 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Focus’ creditors filed an involuntary bankruptcy that led to the appointment of a Chapter 7 Trustee. [Id. at ¶ 13; see also In re Focus Media, Inc., Bankr. Case No. 2:00-bk-38197 (involuntary petition filed October 6, 2000); Focus Media, Inc. v. NBC, 378 F.3d 916 (9th Cir. 2004) (affirmed findings allowing the involuntary bankruptcy and affirmed denial of motion to disqualify the bankruptcy judge).] In connection with Plaintiff’s operation of Focus and also Plaintiff’s activities while Focus was in bankruptcy, Plaintiff was convicted of numerous criminal counts, including wire fraud, mail fraud, bankruptcy fraud and conspiracy. See United States v. Sullivan, et al., 522 F.3d 967 (9th Cir. 2008) (affirmed Plaintiff’s convictions for stealing millions of dollars, including convictions for conspiracy, bankruptcy fraud in connection with Focus’ bankruptcy and mail and wire fraud, that resulted in a prison sentence of 66 months and a restitution order to repay millions).2 Without acknowledging his criminal convictions and his criminal conduct in Focus’ bankruptcy proceeding, Plaintiff files suit seeking to challenge the actions of the Trustee in preparing Focus’ 2000 tax return. C. Plaintiff’s amended 1998 through 2001 tax returns For tax years 1998, 1999 and 2000, Plaintiff filed original returns that were consistent with the flow through income and losses that was reported on K-1s that he received from Focus. [Dkt. 1, Exs. A through C.] In October 2004, Plaintiff filed amended returns claiming a 2000 NOL and then carried back the 2000 NOL to tax years 1998 and 1999. [Dkt. 1-2, Ex. C at 13-14 (NOL worksheet showing a 2 “In resolving a Rule 12(c) motion, the Court may consider certain matters outside the pleadings without converting the motion to one for summary judgment. In particular, the Court may consider matters subject to judicial notice, such as the Prior Action and Criminal Case court records and documents described earlier, of which the Court has taken judicial notice.” Taylor v. San Bernardino County Deputy Sheriffs, 2012 U.S. Dist. LEXIS 184813, at *12 (C.D. Cal. Nov. 29, 2012 (citing L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011); MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986)); see also Fed. R. Evid. 201. Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 9 of 22 Page ID #:417 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 $17.3 NOL); see also 26 U.S.C. § 172(c) (defining NOL as “the excess of the deductions allowed by this chapter over the gross income” and allowing carrybacks and carryforwards of a taxpayer’s NOL as provided in the statute).] Based upon these three amended returns and a 2000 Form 1120S “pro forma” return his accountant prepared, but did not file, on behalf of Focus, Plaintiff claims the United States owes him more than $10 million. [E.g., Dkt. 1.] In support of his reliance upon the 2000 “pro forma” return, Plaintiff alleges that “[t]he Trustee’s returns are incomplete and incorrect. The Taxpayer’s amended returns, including an amended return for Focus Media, contain complete and correct information.” [Dkt. 1 at ¶ 13.] Plaintiff contends that the Trustee’s tax returns filed on behalf of Focus “failed to account for $66,696,211 of debt cancellation income Focus received during tax year 2000 and the trustee did not account for $23,110,349 of bad debts expense Focus was entitled to right off during the pertinent years . . ..” [Id. at ¶ 16.] Plaintiff’s amended 2000 return included the following statement: The reduction of gain on the sale of stock of Focus Media, Inc. in the amount of $16,809,110 and losses claimed as deductions on Schedule E and Form 4797 in the respective amounts of $30,563,376 and $80,410, all in the sum of $47,452,896, flowed from Focus Media, Inc., an S Corporation in which the taxpayer was the sole shareholder. Focus Media is currently in bankruptcy. The bankruptcy trustee has not prepared an amendment to Focus Media’s S corporation return. The accountant for taxpayer has prepared a pro forma amended Form 1120S, U.S. Income Tax Return for an S corporation, for Focus Media’s calendar year 2000 and contends that the reporting positions contained in the amended return are accurate. Accordingly, the aggregate losses being claimed as deductions by taxpayer in this return are those which would be reflected on an amended S corporation return if it had been filed. A copy of the pro forma return is attached to this statement. [Dkt. 1-1, Ex. C at 83.] Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 10 of 22 Page ID #:418 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 In addition to this statement, the 2000 “pro forma” Focus 1120S included a Form 8275 (Disclosure Statement). [Dkt. 1-2, Ex. C at 30.] This statement indicated that the $23 million in bad debts “is based on Focus Media’s best information available at this time coupled with its reasonable determination that such amounts are uncollectible.” [Id.] The “pro forma” return also included a Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)) that was based upon “[d]ischarge of indebtedness in a title 11 case.” [Id. at 31.] With regards to the cancellation of indebtedness income, the “pro forma” return also included a second Form 8275 that indicates that Focus “recognized income from cancellation of indebtedness owed to third parties which it was unable to pay. A portion of the income is being excluded under IRC section 108(a)(1)(B) because the taxpayer was insolvent before the cancellation.” [Dkt. 1-2, Ex. C. at 33.] Relying upon these contrary tax positions, Plaintiff contends that the gain he reported on his 2000 tax return from the sale of stock in Focus Media should be reduced by the amount of indebtedness discharged under 26 U.S.C. § 108(a)(1)(B) in a title 11 proceeding. Plaintiff makes this argument even though 11 U.S.C. § 727(a)(1) does not provide a corporation in a Chapter 7 bankruptcy proceeding with a discharge. [Dkt. 1 at ¶ 8 (relying on the Supreme Court’s interpretation in Gitlitz v. Comm’r, 531 U.S. 206 (2001).3] Instead, relying upon the 2000 “pro forma” Focus return and the resulting NOL the he claims flowed through to his personal return, Plaintiff filed claims 3 On March 9, 2002, the President signed into law the Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, sec. 402(a), 116 Stat. at 40. This law prohibited shareholders of an S corporation from increasing basis for their pro rata shares of the S corporation's discharges of indebtedness after October 11, 2001. This effectively abrogated the Supreme Court's decision in Gitlitz. See Ball v. Comm’r, T.C. Memo 2013-39, at *21-*23 (Feb. 6, 2013) (explaining the reasons for abrogating Gitlitz and the Congress’ amendments to the statute). Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 11 of 22 Page ID #:419 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Forms 1040X for 1998, 1999 and 2000 seeking refunds of $2,564,260 (1998), $595,218 (1999), and $6,957,293 (2000) for a total refund that exceeds $10 million. [Dkt. 1, Claim Numbers 1 through 3.4] The IRS denied Plaintiffs’ refund claims and Plaintiff filed suit. The United States answered Plaintiff’s complaint and then filed an amended answer. [Dkts. 8 & 9.] The United States now files this motion for judgment on the pleadings urging this Court to dismiss Plaintiff’s complaint without leave to amend. III. Argument Federal Rule of Civil Procedure 12(c) permits a party to move for judgment on the pleadings after the pleadings are closed. See Fed. R. Civ. P. 12(c). A motion for judgment on the pleadings is appropriate when “the moving party clearly establishes on the face of the pleadings that no material issue of fact remains to be resolved and that it is entitled to judgment as a matter of law.” Hal Roach Studios v. Richard Feiner &Co., 896 F.2d 1542, 1550 (9th Cir. 1990). Like a Rule 12(b)(6) motion, the court must accept as true all the non-moving party's material allegations of fact. See Westlands Water Dist. v. Firebaugh Canal, 10 F.3d 667, 670 (9th Cir. 1993); Hal Roach Studios, 896 F.2d at 1550. “A judgment on the pleadings is properly granted when, taking all the allegations in the pleading as true, the moving party is entitled to judgment as a matter of law.” Nelson v. City of Irvine, 143 F.3d 1196, 1200 (9th Cir. 1998), cert. denied, 525 U.S. 981 (1998). Based upon the complaint’s material allegations, as well as the exhibits attached thereto, this Court should enter judgment on the pleadings in favor of the United States. 4 While Plaintiff includes a refund claim for tax year 2001, the return included with Exhibit D does not seek a refund amount and paragraph 42 indicates that the claimed refund is “0.” As a result, there is no money to refund. Even if there was, this claim should also be dismissed for similar reasons since it is also based upon returns that Plaintiff is not authorized to file. Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 12 of 22 Page ID #:420 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 A. Refund overview 28 U.S.C. § 1346(a)(1) empowers the court to hear actions for recovery of taxes “alleged to have been erroneously or illegally assessed or collected[.]” 28 U.S.C. § 1346(a)(1). This grant of consent to tax refund suits, however, is not plenary. This provision “must be read in conformity with other statutory provisions which qualify a taxpayer's right to bring a refund suit upon compliance with certain conditions.” United States v. Dalm, 494 U.S. 596, 601 (1990). In bringing suit, Plaintiff cannot meet his burden to prove he is entitled to a refund. See United States v. Janis, 428 U.S. 433, 440 (1976); Lewis v. Reynolds, 284 U.S. 281, 283 (1932). As a result, this Court should dismiss this action. B. Subchapter S Corporations Focus is a subchapter S corporation. [Dkt. 1 at ¶ 4; see also Dkt. 1, Ex. C (pro forma Form 1120S prepared on behalf of Focus, an S corporation).] An S corporation is defined as a small business corporation for which an election under 26 U.S.C. § 1362(a) is in effect for the year. 26 U.S.C. § 1361(a)(1). Generally, an S corporation is not subject to Federal income tax at the entity level. 26 U.S.C. § 1363(a); see also Taproot Admin. Servs., Inc. v. Comm’r, 133 T.C. 202, 204 (2009), aff'd, 679 F.3d 1109 (9th Cir. 2012). S Corporations are required to file a return each year showing in detail their gross income and the deductions they are claiming against that income. See 26 U.S.C. § 6037. Like a partnership, income flows from the S corporation to its shareholders resulting in one level of taxation. See Bufferd v. Comm’r, 506 U.S. 523, 524-25 (1993); Taproot Admin. Servs., 133 T.C. at 204. With regards to a shareholder’s basis, he or she has a tax basis that is equal to the amount of the contributions he or she makes to the capital of the corporation and those contributions are not included as income. See 26 U.S.C. §§ 118 & 1016(a)(1), & 1371(a); Commissioner v. Fink, 483 U.S. 89, 94 (1987); Edwards v. Cuba R.R. Co., 268 U.S. 628, 633 (1925); 26 C.F.R. § 1.118-1. Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 13 of 22 Page ID #:421 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 In accordance with 26 U.S.C. § 1367 (a)(1)(A), a shareholder's tax basis in the S corporation is adjusted to reflect the shareholder's pro rata share of income, losses, deductions, and credits, as calculated under section 1366(a)(1). More specifically, under section 1367(a)(1)(A), a shareholder's tax basis in the stock of an S corporation is increased by the shareholder's share of the S corporation's income items (including tax-exempt income), among other things. Under section 1367(a)(2), a shareholder's tax basis in the stock of an S corporation is decreased (but not below zero) by the shareholder’s pro rata share of losses and deductions, among other things, as specified in 26 U.S.C. § 1367(a)(2). Up until October 2001, as a result of the Supreme Court’s decision in Gilitz, the discharge of indebtedness of an insolvent S Corporation was an item of income, which would pass through to the corporate shareholders and increase their basis. This stepped up basis could reduce the amount of tax liability that would be owed when an interest in the corporation ends. In this case, in Plaintiff’s original 2000 return, he paid taxes on a gain of more than $30 million stemming from the end of his involvement in Focus in July 2000. C. Plaintiff’s 1998-2000 refund claims should be dismissed since his claims are inconsistent with Focus’ 2000 return 1. Plaintiff lacks standing to file a return on behalf of Focus In the case of a corporation subject to bankruptcy proceedings, the person authorized to file the return is not the office of the debtor corporation, but instead the trustee assigned by the court to wind up the debtor’s affairs. See 26 U.S.C. § 6012(b)(3); 6036. Under 26 U.S.C. § 6037(c), any pass through income and losses must be treated consistently with the treatment on the corporate return. The structure of 6037 makes clear that subsection (c) requires shareholders to track the “subchapter S item” information provided to the IRS on a return filed by the corporation under subsection (a) or to identify the inconsistencies. While the income and losses are passed through to the corporate shareholders, courts Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 14 of 22 Page ID #:422 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 recognize the “longstanding rule” that the shareholders and the corporation are separate and that “the business of the corporation is not the business of its shareholders.” Durando v. United States, 70 F.3d 548, 552 (9th Cir. 1995); see also Catalno v. Comm’r, 240 F.3d 842, 843 (9th Cir. 2001) (rejected argument that taxpayer should receive an offsetting adjustment where the IRS disallowed corporate level adjustments, since “[a]n S corporation is a separate entity from its shareholders”); Ding v. Comm’r, 200 F.3d 587, 589 (9th Cir. 1999) (pass through structure does not eliminate the distinction between the corporation and its shareholders). In this case, Plaintiff filed his original 1998 through 2000 returns consistent with the returns filed by Focus. With regards to Focus’ 2000 tax year, the Trustee filed a 2000 return on its behalf. See 26 U.S.C. § 6012(b)(3) (bankruptcy trustee required to file return for a company in bankruptcy). In October 2004, while Focus’ bankruptcy was still going on and after the Trustee prepared a 2000 1120S, Plaintiff filed Forms 1040X seeking a refund for tax years 2000, 1999 and 1998 based upon tax positions that were not taken by the Trustee. Standing in the shoes of Focus’ Trustee and usurping the Trustee’s authority to prepare and file tax returns on behalf of Focus, including determining what debts are discharged and what debts cannot be recovered from Focus’ creditors, Plaintiff prepared a 2000 “pro forma” return and a 2000 pro forma K-1 that he relied upon in filing his 2000 Form 1040X, and then carried back the remainder of the 2000 NOL to tax years 1998 and 1999. [Dkt. 1, Exs. A-C (Oct. 15, 2004 cover letter included with Ex. C explains the NOL and the NOL carryback); Dkt. 1-2 at 40 (pro forma K-1).] In 2001, the Supreme Court issued a decision in Gitlitz v. Comm’r, 531 U.S. 206 (2001), that allowed for an increase in the taxpayer’s basis in an S Corporation through the recognition of the cancellation of indebtedness income. [See also Dkt. 1 at ¶ 8; Dkt. 1-1 at 83 (relying on Gitlitz as a basis for his claim for refund).] Even though Gitlitz only applied to the discharge of indebtedness prior to October Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 15 of 22 Page ID #:423 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2001 and the Trustee did not claim the discharge of indebtedness on Focus’ 2000 return, Plaintiff relies upon this decision in seeking his refund. [Id. at ¶¶ 8-9 (alleging that the cancellation of debt and the accounts receivable were rendered uncollectible within the time period in which Gitlitz pertains).] Specifically, paragraph 4 of the complaint alleges that Plaintiff’s 2000 return “reported an allowed flow-through loss from . . . [Focus], a Subchapter S Corporation, of which the [Plaintiff] was the sole shareholder, the net operating loss of which was carried back to the 1998 and 1994 returns.” [See also Dkt. 1 at ¶ 8.] Plaintiff alleged that he prepared “pro forma tax returns” on behalf of Focus that claimed bad debt losses “on trade accounts receivable and cancellation of debt income was recognized resulting from the inability of Focus to pay indebtedness owed to its trade creditors in 2000.” Plaintiff claims that the income was excluded from Focus’ gross income “because it was insolvent before the cancellation of indebtedness.” [Id. at ¶ 7.] Notwithstanding that the only individual with authority to make those decisions for Focus was the Trustee and that the corporation was not eligible for a bankruptcy discharge under 11 U.S.C. § 727(a)(1), Plaintiffs refund claims must fail since he cannot usurp the authority of the Trustee to make decisions regarding when a debt should be considered uncollectible and when a debt should be considered discharged. Plaintiff lacked the authority to make these decisions for Focus. As a result, after applying the rule of consistency, Plaintiff’s refund claims must fail since accepting his claims would violate 26 U.S.C. § 6037(c), and otherwise lacks the authority to change the positions taken by Focus. See Alon Int’l v. United States, 910 F. Supp. 233, 236 (W.D. Pa. 1995) (denied claim for refund where plaintiff lacked standing to file amended return on behalf of a subchapter S corporation); see also Borton & Sons, Inc., v. United States, Case No. 12-cv-3132-TOR, 2013 U.S. Dist. LEXIS 47739, at *1 (E.D. Wash. Ap. 2, 2013) (dismissed refund action brought by subchapter S corporation for tax liabilities Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 16 of 22 Page ID #:424 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 paid by the individual shareholders for income passed through by the corporation); Ratcliff v. McKeevr, No. 83-civ-6896 (MEL), 1984 U.S. Dist. LEXIS 22846, at *1 n.1 (S.D. N.Y. Oct. 11, 1984) (same). 2. Plaintiff’s Statement of Inconsistency for 2001 does not save his 1998, 1999 and 2000 refund claims In filing his 1998 through 2000 refund claims, Plaintiff failed to include a Form 8082, the statement provided by the IRS to satisfy the statutory requirement, with his 2000 amended return. Under 26 U.S.C. § 6037(c)(2), the Internal Revenue Code provides that Plaintiff can avoid the consistency requirement contained in section 6037 by filing “a statement identifying the consistency” which is done by attaching a Form 8082 (Inconsistent Treatment or Administrative Adjustment Request) to his return. Exhibits A through C reveal that Plaintiff failed to include such a statement and there is no allegation in his complaint that he included one. Section 6037(c)(1) is a mandatory, not a permissive, provision. The use of the word “shall” indicates that Plaintiff must file a 1040 that consistently report the information provided to him on Schedule K-1. Section 6037(c)(2) allows Plaintiff to deviate from this duty of consistency if, but only if, he files with the IRS a statement identifying the inconsistencies. Absent from section 6037(c) is a provision that would allow him to determine that Focus incurred more than $60 million of cancellation of indebtedness income or that it incurred more than $23 million in bad debt losses. As a result, Plaintiff failed to comply with this requirement and his claim for refund was invalid. Furthermore, while Plaintiff included a Form 8082 statement with his 2001 amended return, his 2001 amended return was filed a year after his 1998, 1999 and 2000 returns and Plaintiff did not seek a refund in his 2001 refund claim. [Cf. Dkt. 1, Exs. A-C (1998-2000 Forms 1040X) with Ex. D (Form 8082 included with 2001 Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 17 of 22 Page ID #:425 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Form 1040X).5] Moreover, this Court should reject any attempted reliance upon the statements included with his Forms 1040X. The statements included with his 1998 through 2000 Forms 1040X notify the IRS that he is treating his amended tax returns consistent with the pro forma return he prepared on Focus’ behalf. Because Focus’ original 2000 return did not include the tax items he relies upon in his 2000 Form 1040X and Plaintiff lacked the authorization to file an amended 1120S for Focus, any such statement would not have satisfied the requirement contained in section 6037(c)(2) and would override the Trustee’s authority provided under 26 U.S.C. § 6012(b)(3). For these reasons, this Court should reject Plaintiff’s attempt to usurp the authority of the Trustee who was the only person with the authority to file an amended Form 1120S. In this case, the Court should reject Plaintiff’s attempt to usurp the authority of the Trustee – even without a hint in the complaint that Plaintiff moved the bankruptcy court to force the Trustee to take the positions laid out in his amended returns – in order to obtain refunds that are not based upon tax positions taken on Focus’ 2000 return. D. Plaintiff cannot establish that he is entitled to deduct Focus’ cancellation of debt income Regardless of whether Plaintiff is allowed to base his refund claim on a pro forma return, Plaintiff cannot establish that Focus incurred more than $66 million in cancellation of indebtedness income within the time to take advantage of the Supreme Court’s Gitlitz decision. [Dkt. 1 at ¶¶ 8-9 (arguing that this cancellation of Focus’ indebtedness income occurred within the time frame allowed for taxpayers to take advantage of the Supreme Court’s decision in Gitlitz (i.e., on or before October 2001)).] In the 2000 pro forma return, Plaintiff includes a Form 5 The Form 8082 does not appear to have been included with the version docketed on Pacer. [E.g., Dkt. 1.] The Form 8082 was included with the second to last page in Exhibit D to Plaintiff’s Complaint that was served upon the United States. Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 18 of 22 Page ID #:426 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 982 that indicated Focus discharged more than $66 million in its bankruptcy proceedings. [Dkt. 1-2, Ex. C at 31.] “Proof of basis is a specific fact which the taxpayer has the burden of proving.” O'Neill v. Commissioner, 271 F.2d 44, 50 (9th Cir. 1959), affirming, T.C. Memo. 1957-193. Even if this Court concluded that Plaintiff filed a valid refund claim, this Court should deny Plaintiff’s claim for the cancellation of indebtedness. Under 11 U.S.C. § 727(a)(1), corporations filing a Chapter 7 proceeding are not eligible for a discharge. See NLRB v. Better Bldg. Supply Corp., 837 F.2d 377, 378 (9th Cir. 1988) (“Partnerships and corporations may not discharge their debts in a liquidation proceeding under Chapter 7 of the Code”). Because the reason provided in the Form 982 was “[d]ischarge of indebtedness in a title 11 case,” this Court should reject any attempt to vary the position provided on Form 982. Indeed, the variance doctrine prohibits Plaintiff from establishing another basis to prove the cancellation of indebtedness income. As a result, this Court should conclude that Plaintiff cannot establish that Focus had more than $66 million in cancellation of indebtedness income that flowed through to Plaintiff in order to increase his basis in Focus. See Quarty v. United States, 170 F.3d 961, 972 (9th Cir. 1999) (“Compliance with these specificity requirements is a prerequisite to subject matter jurisdiction over a claim for a refund”); Martinez v. United States, 595 F.2d 1147, 1148 (9th Cir. 1979); Randle v. United States, 2000 U.S. Dist. LEXIS 13591, at *19-20 (C.D. Cal. July 31, 2000) (variance doctrine barred plaintiff’s refund claims); 26 C.F.R. § 301.6402-2(b)(1) (“No refund or credit will be allowed * * * except upon one or more of the grounds set forth in a claim filed.”); see also; Estate of Bird v. United States, 534 F.2d 1214, 1219 (6th Cir. 1976) (finding that a court is without jurisdiction to consider claims not specifically set forth in the claim for refund); Alabama By-Products Corp. v. Patterson, 258 F.2d 892, 900 (5th Cir. 1958) (“All grounds upon which a taxpayer relies must be stated in the original claim for refund so as to apprise the Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 19 of 22 Page ID #:427 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Commissioner of what to look into; the Commissioner can take the claim at its face value and examine only those points to which his attention is necessarily directed. Anything not raised at that time cannot be raised later in a suit for refund”) (citations omitted). CONCLUSION For these reasons, including that Plaintiff’s 2001 refund claim does not seek a refund, the United States of America moves this Court to dismiss Plaintiff’s complaint with prejudice and without leave to amend his complaint since any such amendment would be futile. Respectfully Submitted, Dated: August 26, 2016 EILEEN M. DECKER United States Attorney ROBERT CONTE Assistant United States Attorney Acting Chief, Tax Division /s/ BENJAMIN L. TOMPKINS Assistant United States Attorney Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 20 of 22 Page ID #:428 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PROOF OF SERVICE BY MAILING I am over the age of 18 and not a party to the within action. I am employed by the Office of the United States Attorney, Central District of California. My business address is 300 North Los Angeles Street, Suite 7211, Los Angeles, California 90012. On August 26, 2016, I served DEFENDANT’S NOTICE OF MOTION AND MOTION FOR JUDGMENT ON THE PLEADINGS UNDER FED. R. CIV. P. 12(c); MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THERE OF; (PROPOSED) ORDER ATTACHED on each person or entity name below by enclosing a copy in an envelope addressed as shown below and placing the envelope for collection and mailing on the date and at the place shown below following our ordinary office practices. I am readily familiar with the practice of this office for collection and processing correspondence for mailing. On the same day that correspondence is placed for collection and mailing, it is deposited in the ordinary course of business with the United States Postal Service in a sealed envelope with postage fully prepaid. Date of mailing: August 26, 2016 Place of mailing: Los Angeles, California See attached list I declare under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. I declare that I am employed in the office of a member of the bar of this court at whose direction the service was made. Executed on: August 26, 2016, Los Angeles, California. /s/ _______ Barbara Le Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 21 of 22 Page ID #:429 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 RE: THOMAS E. RUBIN V. USA CASE NO.: CV 16-2567 RGK-JPR Service List Thomas E. Rubin 2915 Olney Pl. Burbank, CA 91504 Case 2:16-cv-02567-RGK-JPR Document 11 Filed 08/26/16 Page 22 of 22 Page ID #:430 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 EILEEN M. DECKER United States Attorney ROBERT CONTE Assistant United States Attorney Acting Chief, Tax Division BENJAMIN L. TOMPKINS (SBN 305024) Assistant United States Attorney Federal Building, Suite 7211 300 North Los Angeles Street Los Angeles, California 90012 Telephone: (213) 894-6165 Facsimile: (213) 894-0115 E-mail: benjamin.tompkins@usdoj.gov Attorneys for Defendant United States of America UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION THOMAS E. RUBIN, Plaintiff, vs. UNITED STATES OF AMERICA, Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. 2:16-cv-02567-RGK-JPR [Proposed] Order After consideration of the Defendant United States of America’s motion for judgment on the pleadings, remainder of the record, and for good cause shown, the Court determines that judgment on the pleadings is appropriate, because Plaintiff Thomas E. Rubin failed to state a claim upon which relief can be granted. \\\ \\\ Case 2:16-cv-02567-RGK-JPR Document 11-1 Filed 08/26/16 Page 1 of 4 Page ID #:431 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Furthermore, because any amendment would be futile, the Court denies the Plaintiff the opportunity to file an amended complaint. As such, the case against the United States of America is dismissed with prejudice. IT IS SO ORDERED. DATED: ____________________________________ R. GARY KLAUSNER United States District Judge Respectfully Submitted, EILEEN M. DECKER United States Attorney ROBERT CONTE Assistant United States Attorney Acting Chief, Tax Division ________/s/______________ BENJAMIN L. TOMPKINS Assistant United States Attorney Attorneys for Defendant United States of America Case 2:16-cv-02567-RGK-JPR Document 11-1 Filed 08/26/16 Page 2 of 4 Page ID #:432 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PROOF OF SERVICE BY MAILING I am over the age of 18 and not a party to the within action. I am employed by the Office of the United States Attorney, Central District of California. My business address is 300 North Los Angeles Street, Suite 7211, Los Angeles, California 90012. On August 26, 2016, I served (PROPOSED) ORDER on each person or entity name below by enclosing a copy in an envelope addressed as shown below and placing the envelope for collection and mailing on the date and at the place shown below following our ordinary office practices. I am readily familiar with the practice of this office for collection and processing correspondence for mailing. On the same day that correspondence is placed for collection and mailing, it is deposited in the ordinary course of business with the United States Postal Service in a sealed envelope with postage fully prepaid. Date of mailing: August 26, 2016 Place of mailing: Los Angeles, California See attached list I declare under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. I declare that I am employed in the office of a member of the bar of this court at whose direction the service was made. Executed on: August 26, 2016, Los Angeles, California. /s/ _______ Barbara Le Case 2:16-cv-02567-RGK-JPR Document 11-1 Filed 08/26/16 Page 3 of 4 Page ID #:433 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 RE: THOMAS E. RUBIN V. USA CASE NO.: CV 16-2567 RGK-JPR Service List Thomas E. Rubin 2915 Olney Pl. Burbank, CA 91504 Case 2:16-cv-02567-RGK-JPR Document 11-1 Filed 08/26/16 Page 4 of 4 Page ID #:434