Uniquest,Et al v. USA

Cross MOTION for Summary Judgment

W.D.N.Y.March 21, 2017

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK ________________________________________________ UNIQUEST DELAWARE LLC, UNILAND HOLDINGS LLC, As Tax Matters Partners, Plaintiffs Civil No. 15-CV-638W(F) v. UNITED STATES OF AMERICA, Defendant. __________________________________________________ NOTICE OF CROSS-MOTION Nature of Action: Federal Income Taxation Moving Party: Plaintiffs, Uniquest Delaware LLC and Uniland Holdings LLC Directed To: Defendant, United States of America Date and Time: To be scheduled by the Court Place: Hon. Elizabeth Wolford, USDJ US Courthouse, 100 State Street, Rochester, New York Supporting Papers: (1) Plaintiffs’ Response to Defendant’s Local Rule 56 Statement of Facts; (2) Plaintiffs’ Local Rule 56 Statement of Material Facts Concerning Which There Is No Genuine Issue; (3) Declaration of Hugh M. Russ, III, with Exhibits; (4) Declaration of Kenneth A. Schoetz; (5) Declaration of Michael J. Montante; (6) Plaintiffs’ Memorandum of Law. Answering Papers: If any, are required to be filed as indicated by the Court. Relief Requested: (1) Order under Federal Rule of Civil Procedure 15 allowing Plaintiffs to amend their complaint; (2) Order granting Plaintiff’s motion for summary judgment Case 1:15-cv-00638-EAW-LGF Document 41 Filed 03/21/17 Page 1 of 2 - 2 - under Federal Rule of Civil Procedure 56, and (3) Order denying Defendant’s motion for summary judgment under Federal Rule of Civil Procedure 56. Grounds for Relief: Federal Rules of Civil Procedure 15, 56; Local Rules of Civil Procedure 7, 56. Oral Argument: Requested, if permitted by the Court. Dated: Buffalo, New York March 21, 2017 HODGSON RUSS LLP Attorneys for Plaintiffs By: s/ Hugh M. Russ, III Hugh M. Russ, III 140 Pearl Street, Suite 100 Buffalo, New York 14202 Telephone: (716) 856-4000 hruss@hodgsonruss.com 081410.00000 Business 15861942v1 Case 1:15-cv-00638-EAW-LGF Document 41 Filed 03/21/17 Page 2 of 2 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK ________________________________________________ UNIQUEST DELAWARE LLC, UNILAND HOLDINGS LLC, As Tax Matters Partners, Plaintiffs Civil No. 15-CV-638W(F) v. UNITED STATES OF AMERICA, Defendant. __________________________________________________ PLAINTIFFS’ RESPONSE TO DEFENDANT’S LOCAL RULE 56 STATEMENT OF FACTS Plaintiffs, Uniquest Delaware LLC and Uniland Holdings LLC (“Uniquest”), by their attorneys, Hodgson Russ LLP, respond to Defendant’s Local Rule 56 Statement of Facts as follows: 1. With the exception that Plaintiff’s correct name is Uniquest Delaware LLC (“Uniquest”) and Uniquest’s two members are Uniland Holdings LLC (“Uniland Holdings”) and UQD Holdings LLC (“UQD Holdings”), admit. 2. Admit 3. Admit 4. Admit 5. Admit Case 1:15-cv-00638-EAW-LGF Document 41-1 Filed 03/21/17 Page 1 of 5 2 6. Admit 7. Admit 8. Admit 9. Admit 10. Admit 11. Admit 12. Admit 13. Admit 14. Admit 15. Admit that Empire State Development provided a draft proposal. 16. Admit 17. Admit 18. Admit 19. Admit 20. Admit 21. Admit that Uniquest representatives exchanged emails internally and externally following the signing of the October 9, 2007 proposal but deny that the emails Case 1:15-cv-00638-EAW-LGF Document 41-1 Filed 03/21/17 Page 2 of 5 3 referenced by Defendant (the 10/19/07 email chain [Cole Decl. Ex. 3] and the 10/26/07 email [Cole Decl. Ex. 4]) discuss income tax issues or in any way mention state tax issues. The only substantive issue discussed in these emails is a personal guarantee on a loan related to the project. Plaintiffs also deny that the emails referenced above contain any redactions. 22. Admit. 23. Admit. 24. Admit 25. With the exception that the LaPoint email is commenting specifically on the revised incentive proposal, admit. 26. Plaintiffs admit that emails were exchanged. Plaintiffs admit the specific language quoted from the 11/14/2007 emails [Cole Decl., ex. 8] but deny the remainder of Defendant’s statements. Plaintiffs add that the 11/14/2007 email from Empire State Development to a Uniquest attorney [Cole Decl. Ex. 8] responds to Uniquest’s suggested changes to language in the Grant Disbursement Agreements (“GDAs”) sent to Empire State Development on November 12, 2007 and not to the proposed changes to the introductory paragraph of the Incentive Proposal. Plaintiffs also add that the email from Uniquest’s attorney to Empire State Development states in full that, “The chamges [sic] are intended to reflect that the Initial Disbursement is not tied to an [sic] the scheduled % increase in jobs, just the Second and Third Disbursements. That was my understanding after our last conference call. Is that correct?” [italics added for emphasis]. Case 1:15-cv-00638-EAW-LGF Document 41-1 Filed 03/21/17 Page 3 of 5 4 27. Plaintiffs clarify that Andreucci advised Uniquest that Empire State Development’s General Counsel, “Will not approve your suggested language to the GDA and offer.” [Italics added]. The Andreucci email does not reference the Incentive Proposal. 28. Admit 29. Admit but add that the December 14, 2007 executed version of the Incentive Proposal does not include any language indicating the stated purpose or beneficiary of the project. 30. Admit the first and third sentence of the paragraph. Plaintiffs clarify that disbursement of 75 percent of the Incentive Grants was not conditioned on the creation of any jobs or number of employees at the Avant Building. 31. Deny the first sentence but admit the second sentence. 32. Admit but clarify that ESD first sent a Revised Incentive Proposal to Uniquest in November, 2008. 33. Admit 34. Admit 35. Admit 36. State that the reference should be to Cole Decl. Ex. 12, but deny that Plaintiffs are not relying on an opinion from a professional as a defense to the counterclaim. 37. Admit Case 1:15-cv-00638-EAW-LGF Document 41-1 Filed 03/21/17 Page 4 of 5 5 38. Admit 39. Admit 40. Admit 41. Admit 42. Admit 43. Admit 44. Admit 45. Admit that Defendant has filed a counterclaim but deny that Defendant is entitled to the relief requested. 46. Admit Dated: Buffalo, New York March 21, 2017 HODGSON RUSS LLP Attorneys for Plaintiffs By: Hugh M. Russ, III Hugh M. Russ, III 140 Pearl Street, Suite 100 Buffalo, New York 14202 Telephone: (716) 856-4000 hruss@hodgsonruss.com 081410.00000 Business 15861847v2 Case 1:15-cv-00638-EAW-LGF Document 41-1 Filed 03/21/17 Page 5 of 5 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK ________________________________________________ UNIQUEST DELAWARE LLC, UNILAND HOLDINGS LLC, As Tax Matters Partners, Plaintiffs Civil No. 15-CV-638W(F) v. UNITED STATES OF AMERICA, Defendant. __________________________________________________ PLAINTIFFS’ LOCAL RULE 56 STATEMENT OF MATERIAL FACTS CONCERNING WHICH THERE IS NO GENUINE ISSUE Plaintiffs, Uniquest Delaware LLC and Uniland Holdings LLC (“Uniquest”), by their attorneys, Hodgson Russ LLP, provide the following material facts concerning which no genuine issue exists. Uniquest’s material facts supplement those material facts already provided by the United States. Uniquest states as follows: 1. UQD Holdings, LLC (“UQD Holdings”), a 50% member of Uniquest Delaware LLC, is owned by two corporations, Univest I Corporation and Univest II Corporation, each owning a 50% interest in UQD Holdings and each subject to tax under Subchapter S of the Internal Revenue Code. 2. Uniland Holdings, LLC (“Uniland Holdings”), a 50% member of Uniquest Delaware LLC, is owned by two corporations, Univest I Corporation and Univest II Case 1:15-cv-00638-EAW-LGF Document 41-2 Filed 03/21/17 Page 1 of 7 2 Corporation, each owning a 50% interest in UQD Holdings and each subject to tax under Subchapter S of the Internal Revenue Code. 3. The shareholders of Univest I Corporation consist of an individual, Michael J. Montante, and two trusts (Ivestor Trust V and Montante M. Trust). 4. The shareholders of Univest II Corporation consist of an individual, Carl J. Montante Jr., and two trusts (Ivestor Trust V and Montante M. Trust). 5. All income, gain, loss and deductions of Uniquest flow to the shareholders of Univest I Corporation and Univest II Corporation. 6. In May, 2007 Uniquest submitted an application to the New York State Department of Environmental Conservation for tax credits under the Brownfield Cleanup Program. 7. On or about that same time, Uniquest, through Carl Montante, Sr. and Michael J. Montante, began discussing redevelopment of the Dulski Federal Office Building with Governor Elliot Spitzer and Empire State Development Corporation (“ESD”), including the need for financial incentives from New York State in order to move the project forward. 8. ESD is New York’s primary economic development agency with a stated mission to grow, diversify, and stabilize the state and local economies in New York through grants, loans, credits and other forms of financial assistance to enhance private business investment. ESD’s mission statement and related materials are publicly available at https://esd.ny.gov/about-us. Case 1:15-cv-00638-EAW-LGF Document 41-2 Filed 03/21/17 Page 2 of 7 3 9. ESD is required to track and report on jobs created and retained on ESD grants and loans and it did so with respect to the Incentive Grants and other financial assistance provided to Uniquest. A copy of the 2011 report is available at https://cdn.esd.ny.gov/Reports/AnnualReportofEmployment2011Final_121411.pdf. 10. In June, 2007, a Uniquest representative communicated to Governor Spitzer that Uniquest was still waiting for a response from the Department of Environmental Conservation regarding the application for the Brownfield Cleanup Program. Uniquest anticipated that, once the project was accepted into the Brownfield program, the project would move forward immediately, so that “this building [would not] turn into another Dunlop/Occidental building sitting in blight condition for decades as happened on Grand Island.” A copy of the email is attached to the Russ Declaration as Exhibit E. 11. On August 6, 2007, an attorney for Uniquest sent a Memorandum to Kenneth Schoetz of ESD and Hadley Pawlak of the Urban Development Corporation outlining why the Avant project was eligible for Brownfield credits and the detailing benefits it would provide to Buffalo by moving forward. A copy of the memorandum is attached to the Russ Declaration as Exhibit F. 12. Throughout August, 2007, Uniquest representatives continued to discuss with ESD the project’s eligibility for Brownfield credits and/or alternative sources of ESD funding to ensure that the Avant project would move forward with or without the Brownfield credits. 13. Uniquest representatives communicated to the Governor and ESD that, without financial incentives from New York State, the project would not be completed and that Case 1:15-cv-00638-EAW-LGF Document 41-2 Filed 03/21/17 Page 3 of 7 4 no other developer was interested in the project. Uniquest submits the Declaration of Michael J. Montante, dated March 17, 2017, and the Declaration of Kenneth A. Schoetz, dated March 10, 2017, to support its motion. 14. After discussions with Kenneth Schoetz, General Counsel and Western New York Executive Director of ESD, and other representatives of ESD, Michael Montante received the first draft ESD Incentive Proposal on August 30, 2007. Montante made changes to the document on August 31, 2007. A copy of the redlined version of the proposal is attached to the Russ Declaration as Exhibit G.1 15. The cover letter from Mr. Schoetz that accompanied the August 30, 2007 Incentive Proposal states that Uniquest will “redevelop the former federal building” and [t]o encourage you to proceed with this project, we are offering a package of state and/or local incentives…” A copy of the letter is attached to the Russ Declaration as Exhibit H. 16. The August 30, 2007 Incentive Proposal consisted of two grants totaling $7,000,000. 17. The first grant, Capital Grant V784, was for reimbursement for certain demolition, construction, and development costs of the office component of the project. 18. The second grant, Urban and Community Development Program V785, was for reimbursement of certain costs associated with building shell renovation and the hotel component of the project. 1 This version of the Incentive Proposal was inadvertently excluded from Plaintiffs’ production of documents on May 27, 2016. Case 1:15-cv-00638-EAW-LGF Document 41-2 Filed 03/21/17 Page 4 of 7 5 19. 75 Percent of the V784 and V785 grants was to be disbursed upon completion of the project based on Uniquest documenting its expenditures. 20. The remaining 25 percent of the V784 and V785 grants was to be disbursed upon achievement of certain employment goals. 21. A subsequent version of the ESD Incentive Proposal was dated October 9, 2007 and executed by representatives of ESD and Uniquest. 22. The October 9, 2007 Incentive Proposal consisted of three incentive grants totaling $7,000,000. These included the Capital Grant (V784), the Urban and Community Development Program (V785), and an Empire Opportunity Fund Capital Grant (V806), which would provide reimbursement for demolition and construction costs associated with the hotel and restaurant components of the project. 23. As with the V784 and V785 Incentive Grants, 75 percent of the V806 grant was to be disbursed upon completion of the project based on documented expenditures. 24. The remaining 25 percent of the V806 grant would be disbursed upon achievement of certain employment goals. 25. The ESD Incentive Proposal was finalized on December 14, 2007. 26. The amounts of the three Incentive Grants, and the requirements for disbursing the grants, including the compliance thresholds that needed to be satisfied in order for the monies to be disbursed, were not changed between the October 9, 2007 Incentive Proposal and the December 14, 2007 Incentive Proposal. Case 1:15-cv-00638-EAW-LGF Document 41-2 Filed 03/21/17 Page 5 of 7 6 27. Based on discussions between Uniquest and ESD in 2008 regarding an increase in costs of the Avant project, a Revised Incentive Proposal was finalized on January 13, 2009 and sent by ESD to Uniquest on January 21, 2009. A copy of the proposal is attached to the Russ Declaration as Exhibit I. 28. The total amount of the three Incentive Grants (V784, V785, and V806) was increased to $11,000,000. 29. The requirements for disbursing the grants, other than increases to the amounts of the verified expenditures required to be documented in order for the grant monies to be disbursed, were not changed from earlier versions of the Incentive Grants. 30. In all versions of the ESD Incentive Proposals and Revised Incentive Proposals, the General Information section lists the Type of Business of the Incentive Grant recipient, Uniquest Delaware LLC, as “Development corporation.” 31. By July, 2009, the Avant project was substantially completed. The Embassy Suites Hotel opened its doors, commercial tenants began occupying space, and residential condominiums went on the market. 32. By the end of 2009, all requirements of the ESD Incentive Grants were met, and ESD disbursed $11,000,000 to Uniquest. 33. On July 23, 2009, Dennis M. Mullen, President of Upstate Empire State Development Corporation, presented his Findings and Determinations to the Board of Directors of ESD regarding the Avant project. As part of those findings, Mr. Mullen stated that, “Without ESD funding, Uniquest would not have proceeded with the project and 2010 new jobs would not Case 1:15-cv-00638-EAW-LGF Document 41-2 Filed 03/21/17 Page 6 of 7 7 be created.” A copy of the Findings and Determination are available at https://cdn.esd.ny.gov/AboutUs/Data/BoardMaterials/July2009/072309_UniQuest.pdf and a copy is attached here as to the Russ Declaration as Exhibit L. Dated: Buffalo, New York March 21, 2017 HODGSON RUSS LLP Attorneys for Plaintiffs By: Hugh M. Russ, III Hugh M. Russ, III 140 Pearl Street, Suite 100 Buffalo, New York 14202 Telephone: (716) 856-4000 hruss@hodgsonruss.com 081410.00000 Business 15861798v2 Case 1:15-cv-00638-EAW-LGF Document 41-2 Filed 03/21/17 Page 7 of 7 Case 1:15-cv-00638-EAW-LGF Document 41-3 Filed 03/21/17 Page 1 of 3 Case 1:15-cv-00638-EAW-LGF Document 41-3 Filed 03/21/17 Page 2 of 3 Case 1:15-cv-00638-EAW-LGF Document 41-3 Filed 03/21/17 Page 3 of 3 Case 1:15-cv-00638-EAW-LGF Document 41-4 Filed 03/21/17 Page 1 of 3 Case 1:15-cv-00638-EAW-LGF Document 41-4 Filed 03/21/17 Page 2 of 3 Case 1:15-cv-00638-EAW-LGF Document 41-4 Filed 03/21/17 Page 3 of 3 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK ________________________________________________ UNIQUEST DELAWARE LLC, UNILAND HOLDINGS LLC, As Tax Matters Partners, Plaintiffs Civil No. 15-CV-638W(F) v. UNITED STATES OF AMERICA, Defendant. __________________________________________________ UNIQUEST’S SUMMARY JUDGMENT MEMORANDUM OF LAW HODGSON RUSS LLP Attorneys for Plaintiff Hugh M. Russ, III Christopher L. Doyle The Guaranty Building 140 Pearl Street, Suite 100 Buffalo, NY 14202-4040 716.856.4000 Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 1 of 18 TABLE OF CONTENTS PAGE i INTRODUCTION ...........................................................................................................................1 STATEMENT OF FACTS ..............................................................................................................2 ARGUMENT ...................................................................................................................................4 POINT I. THE COURT SHOULD PERMIT UNIQUEST TO AMEND ITS COMPLAINT .............................................................................4 POINT II. UNIQUEST HAS DEMONSTRATED ITS ENTITLEMENT TO SUMMARY JUDGMENT. ..................................................7 POINT III. AS A MATTER OF LAW, THE ESD INCENTIVE GRANTS ARE NOT INCOME TO UNIQUEST ....................7 The ESD Incentive Grants are excludable from Uniquest’s income under the inducement doctrine. ...................................................................................................................8 POINT IV. AS A MATTER OF LAW, THE ESD INCENTIVE GRANTS ARE NOT INCOME TO UNIVEST I AND UNIVEST II ...................................16 A. The ESD Incentive Grants are capital contributions under the Supreme Court’s definition. ...............................................................................................................17 B. Both Univest I and Univest II are S corporations. Corporations are entitled to exclude “contributions to the capital of a corporation” under I.R.C. § 118. .........27 C. Univest I and Univest II’s allocable portions of the ESD Incentive Grants are excludable from income under I.R.C. §§ 118 and 702. .........................................28 POINT V. THE COURT SHOULD DENY DEFENDANT’S MOTION FOR SUMMARY JUDGMENT...........................................................33 Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 2 of 18 TABLE OF CONTENTS - cont’d PAGE ii POINT VI. THE PENALTIES SOUGHT TO BE ASSESSED BY THE UNITED STATES DO NOT APPLY TO UNIQUEST ........................................................................39 CONCLUSION ..............................................................................................................................41 Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 3 of 18 TABLE OF AUTHORITIES PAGE iii Federal Cases AT&T, Inc. v. United States, 629 F.3d 505 (5th Cir. 2011) ...........................................................................22, 23, 24, 25, 26 Bautista v. CytoSport, Inc., No. 15-CV-9081, 2016 WL 7192109 (S.D.N.Y. Dec. 12, 2016) ..............................................5 Brown Shoe v. Commissioner, 339 U.S. 583 (1950) .................................................................................8, 9, 10, 14, 19, 21, 37 Collins v. Commissioner, 3 F.3d 625 (2d Cir. 1993) ........................................................................................................36 Commissioner v. Glenshaw Glass, 348 U.S. 426 (1955) ...........................................................................................................17, 35 Commissioner v. Kowalski, 434 U.S. 77 (1977) ...................................................................................................................36 Commissioner v. Schleier, 515 U.S. 323 (1995) .................................................................................................................36 Continental Tie & Lumber Co. v. United States, 286 U.S. 290 (1932) .................................................................................................................20 Cortec Industries, Inc. v. Dubin Clark & Co., 949 F.2d 42 (2d Cir. 1991).........................................................................................................6 Davis v. Dep’t of Treasury, 489 U.S. 803 (1989) ...........................................................................................................30, 39 Elliot-Leach v. N.Y.C. Dep’t of Educ., 15 Civ. 5982, 2016 WL 4446147 (E.D.N.Y. Aug. 8, 2016) ......................................................6 Fed. Bulk Carriers v. Comm’r, 66 T.C. 283 (1976) .....................................................................................................................9 Freedom Newspapers, Inc. v. Comm’r, T.C.M. 1977-429........................................................................................................8, 9, 10, 14 G.M. Trading Corporation v. Commissioner, 121 F.3d 977 (5th Cir. 1997) .................................................................................22, 23, 25, 26 Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 4 of 18 TABLE OF AUTHORITIES - cont’d PAGE iv General Motors Corp. v. Comm’r, 112 T.C. 270 (1999) ...........................................................................................................11, 14 McCarthy v. Dun & Bradstreet Corp., 482 F. 3d 184 (2d Cir. 2007)......................................................................................................6 Midlantic Nat’l Bank v. N.J. Dep’t of Envtl. Prot., 474 U.S. 494 (1986) .................................................................................................................39 Sakol v. Commissioner, 574 F.2d 694 (2d Cir. 1978).....................................................................................................36 Sprint Nextel Corporation v. United States, 779 F. Supp. 2d 1184 (D. Kan. 2011) ......................................................................................22 Temple v. Hudson View Owners Corp., No. 16-CV-3203, 2016 WL 6993846 (S.D.N.Y. Nov. 28, 2016) ..............................................5 Texas & Pacific Railway v. United States, 286 U.S. 285 (1932) .................................................................................................................20 United States v. Basye, 410 U.S. 441 (1973) .................................................................................................................28 United States v. Chicago, Burlington & Quincy R.R., 412 U.S. 401 (1973) .............................................................................18, 19, 22, 23, 25, 26, 38 United States v. Costal Utilities, Inc., 483 F. Supp. 2d 1232 (S.D.G.A. 2007), aff’d by 514 F.3d 1184 (11th Cir. 2008) ............................................................................................................................22, 24, 25 United States v. Woods, 134 S. Ct. 557 (2013) ...........................................................................................................4, 16 Wolfers v. Commissioner, 69 T.C. 975 (1978) ...................................................................................................................28 Yin v. NFTA, 188 F. Supp. 3d 259 (W.D.N.Y. 2016) ......................................................................................7 Federal Statutes 26 U.S.C. § 61(a) ...........................................................................................................................37 Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 5 of 18 TABLE OF AUTHORITIES - cont’d PAGE v Rules Federal Rule of Civil Procedure 15(a)(2) ........................................................................................5 Federal Rule of Civil Procedure 56 .................................................................................................7 Code and Regulations 1988. I.R.........................................................................................................................................37 I.R.C. § 61 ......................................................................................................................................35 I.R.C.§ 61(a)(1)-(15) ......................................................................................................................35 I.R.C. § 61 ......................................................................................................................................35 I.R.C. §§ 71-90...............................................................................................................................35 I.R.C. § 83 ......................................................................................................................................36 I.R.C. § 104 ....................................................................................................................................36 I.R.C. § 118 ................................................................5, 6, 17, 27, 28, 31, 33, 34, 35, 36, 37, 38, 39 I.R.C. §§ 118 and 702 ..............................................................................................................17, 28 I.R.C. § 118(a) ...............................................................................................................................18 I.R.C. § 118 ................................................................................................................................5, 34 I.R.C. § 119 ....................................................................................................................................36 I.R.C. § 362(c) ...............................................................................................................................28 I.R.C. § 701 ....................................................................................................................................16 I.R.C. §§ 701-704...........................................................................................................................28 I.R.C. § 702 ........................................................................................................................17, 29, 33 I.R.C. § 702(a) ...............................................................................................................................29 Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 6 of 18 TABLE OF AUTHORITIES - cont’d PAGE vi I.R.C. § 702(a), (1) - (8) .................................................................................................................29 I.R.C. § 702(a) (1) through (6), I.R.C. § 702(a)(1)-(6) ..................................................................29 I.R.C. § 702(a)(7) .....................................................................................................................17, 29 I.R.C. § 702(b) .........................................................................................................................17, 32 I.R.C. §§ 1361-79...........................................................................................................................27 I.R.C. § 6662(a) .............................................................................................................................39 I.R.C. § 6664(c)(1) ...................................................................................................................39, 40 I.R.S. Priv. Ltr. Rul. 7950002 (Aug. 2, 1979) ...............................................................................38 I.R.S. Priv. Ltr. Rul. 8038037 (June 24, 1980) ..............................................................................38 GCM 38944 (Dec 27, 1982) ..........................................................................................................38 N.Y. Comp. Codes R. & Regs. tit. 21, §§ 4200-254 (2017) ..........................................................15 Rep. No. 1337, 83d ..................................................................................................................29, 30 Rev. Rul. 72-132, 1972-1 C.B. 21 .................................................................................................38 Rev. Rul. 88-76, 1988-2 C.B. 360 .................................................................................................37 Rev. Rul. 2006-27, 2006-1 C.B. 915 .......................................................................................11, 14 Revenue Ruling 2006-27 ...............................................................................................................14 Treas. Reg. § 1.702-1(b) ................................................................................................................32 Treas. Reg. § 1.6664-4(c)(2) ..........................................................................................................40 Treas. Reg. § 702-1(a)(8)(ii) ..............................................................................................29, 30, 31 Treasury Regulation 702-1(a)(8)(ii) ........................................................................................29, 31 Treasury Regulation § 1.6664-4(c) ................................................................................................40 Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 7 of 18 TABLE OF AUTHORITIES - cont’d PAGE vii Constitutional Provisions Sixteenth Amendment ..............................................................................................................19, 37 United States Constitution Due Process Clause.............................................................................36 Other Authorities 2d Sess. A222 (1954) ...............................................................................................................29, 30 10 B.T.A 1036 (1928) ............................................................................................................8, 9, 14 131 T.C. 262 (2008) .................................................................................................................27, 28 6 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1006 (3d ed. 1998) ..............................................................................................................................6 I.R.S. AOD-1976-435 (Nov. 23, 1976) ...........................................................................................9 LMSB Coordinated Issue Paper LMSB4-1008-051 (Nov 18, 2008) (available at http://www.irs.gov/businesses/article/0,id=200263,00.html) ..................................................38 Report on Jobs Created and Retained on ESD Grant and Loan Programs and Status Report on UDC Loan Portfolio (December 14, 2011) ..................................................15 S. Rep. No. 1622, 83d Cong., 2d Sess. 377 (1954)........................................................................29 Southern Family Insurance v. United States, No. 8:05-cv-2158-T-30MAP, 2010 WL 4974612 .................................................22, 24, 26, 27 Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 8 of 18 INTRODUCTION This case concerns the federal tax treatment of $11 million in Empire State Development Incentive Grants (“ESD Incentive Grants”) Uniquest received to redevelop the former Dulski Federal Office Building into the Avant – a hotel, restaurant, office, and condominium complex on Delaware Avenue in Buffalo, New York, two blocks from the Robert H. Jackson United States Courthouse. Because the Grants incentivized Uniquest to undertake the project, and because Uniquest would not have performed the work without those Grants, Uniquest did not include the Grants as income. Instead, Uniquest treated the ESD Incentive Grants as a reduction in its basis in the property under recognized common law doctrines. The United States now refuses to recognize the inducement doctrine or a common law contribution to capital doctrine, and it has indicated that the grants should have been treated as income by Uniquest. This dispute results. The entire position advanced by the United States boils down to two sentences in its brief in support of its summary judgment motion: “This case concerns the income tax treatment of the $11.0 million paid to the partnership,” and “The government contends that this money, which increased the wealth of the partners by $11.0 million, is income to the partners of the partnership.” Def.’s Mot. Summ. J. 1. This position ignores Supreme Court precedent, decades of common law, and the Internal Revenue Code (“Code”). The Court should reject this ill-founded, ill-conceived, and ill-reasoned position. Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 9 of 18 2 STATEMENT OF FACTS Plaintiffs’ Local Rule 56 Statement of Material Facts recites the entire factual background relevant to the pending motions. Included here is only a brief summary of those facts. In 2006, Uniquest Delaware LLC (“Uniquest”) purchased the Dulski office building at 200 Delaware Avenue for $6.1 million on auction as part of Buffalo’s plan to revitalize certain city neighborhoods. In its heyday, the Dulski building housed 2000 federal employees. By late 2005, however, the building was closed due to environmental contamination. It sat vacant in a central location of downtown Buffalo. Uniquest offered to purchase the building, located in one of the areas targeted for revitalization. Uniquest’s plan was to strip the existing building down to its steel skeletal structure to remediate the asbestos and PCB contamination and construct a new hotel, commercial space, and residential units on the site. Uniquest purchased the building with the expectation of obtaining tax credits under New York State’s Brownfield Cleanup Program, which would substantially offset Uniquest’s financial investment in the project—a necessary condition for Uniquest’s owners to undertake the project. At the time of the building’s purchase, Uniquest was an unincorporated joint venture between Uniland Holdings LLC and Acquest TP Acquisition LLC. On March 6, 2007, Uniquest registered as a domestic limited liability company in New York. Acquest subsequently sold its interest to UQD Holdings LLC. Uniquest’s two partners, Uniland Holdings LLC and UQD Holdings LLC, are partnerships for tax purposes. They are each owned equally by two corporations, Univest I Corporation and Univest II Corporation (the “S Corporations”). Therefore, 100 percent of Uniquest’s items of income, gain, loss, and deduction flow up to and Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 10 of 18 3 through the S Corporations. Each of the S Corporations has elected to be subject to Subchapter S of the Code. The S Corporations’ shareholders are the ultimate parties of interest in this case, since all of Uniquest’s income tax items of gain, loss, deduction, and credit flow up through the partnership’s S Corporations and, for income tax purposes, are ultimately taken into account by the shareholders. In early 2007, shortly after acquiring the property at 200 Delaware Avenue, Uniquest began the process of applying for tax credits under the Brownfield Cleanup Program to offset the approximately $10.2 million in anticipated environmental cleanup costs. Simultaneously, Uniquest reached out to New York Governor Eliot Spitzer and Empire State Development (“ESD”) to make sure they were aware of the project, its importance for the revitalization of downtown Buffalo, and the necessity for state financial assistance in order to complete the project. In August 2007, as Uniquest continued its conversations with ESD, Uniquest learned that it would likely not be eligible for the Brownfield tax credits. Knowing that the project could not proceed without a similar level of investment from New York State, Uniquest focused its discussions with ESD on alternative sources of state investment. ESD, with support from political leaders in New York State and Buffalo, recognized the value of the project for Buffalo’s revitalization, particularly since it occupied such a prominent location in the downtown commercial district. ESD therefore agreed to a package of Incentive Grants, along with additional state and local financing, to encourage Uniquest to proceed with the project. On August 30, 2007, ESD prepared the draft Incentive Proposal, including Incentive Grants totaling $7 million. Negotiations continued until a Revised Incentive Proposal was signed by the parties in December 2007. Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 11 of 18 4 Having secured the necessary investment from New York State, Uniquest continued with the environmental remediation and began construction of the hotel, office and commercial space, and residential units. By mid-2008, it became clear that the costs of the project were going to be higher than anticipated. Consequently, Uniquest renewed discussions with ESD to increase the Grant funding. In January 2009, a Revised Incentive Proposal was finalized, increasing the three existing Incentive Grants to $11 million. By July 2009, the Avant was substantially completed, and commercial tenants began moving into the office space. The Embassy Suites hotel opened its doors to the public, and the residential condominiums went on the market. Pursuant to the terms of the ESD Incentive Grants, ESD disbursed $11 million in grant monies to Uniquest in 2009. Upon receipt of the Grants, Uniquest reduced the depreciable basis of the Avant assets by $11 million to reflect that the project was partly financed by the Grants. ARGUMENT POINT I. THE COURT SHOULD PERMIT UNIQUEST TO AMEND ITS COMPLAINT In its brief, the United States recognizes that the ultimate taxpayers are the real parties in interest: “A partnership does not pay federal income taxes; instead its taxable income and losses pass through to the partners.” Def.’s Mot. Summ. J. 6 (citing United States v. Woods, 134 S. Ct. 557, 562 (2013). To justify a counterclaim for penalties, the United States suggests that the ultimate individual taxpayers should be responsible for payment of penalties in addition to the taxes they have already paid. “In addition to being liable for their share of the $11 million of grants that flow through to them as income, Uniquest partners are also liable for an addition to Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 12 of 18 5 tax under 26 U.S.C. § 6662(b) of twenty percent of the amount of the underpayment of tax.” Def.’s Mot. Summ. J. 19. Thus, the United States asks the Court to analyze the tax issues and potential penalties presented in this case at the level of the individual taxpayers. For this reason—the requirement for analysis at the individual taxpayer level—Uniquest seeks to amend its Complaint to include a claim under I.R.C. § 118. To some extent, the government’s brief actually anticipates Uniquest’s proposed amended complaint. That brief includes extensive analysis of the application of I.R.C. § 118, which addresses contributions to capital, arguing that Uniquest is not entitled to treat the ESD Incentive Grants as a contribution to capital. “While not really relevant in this case, because Uniquest is not a corporation, it is unlikely on the facts of this case that Uniquest would be entitled to the Section 118 exclusion even if it were a corporation.” Id. at 10. Because the United States invokes I.R.C. § 118’s application at the partner and corporate level, Uniquest also seeks to amend. Regarding the liberal attitude toward amending, Federal Rule of Civil Procedure 15(a)(2) provides, in part: (2) Other Amendments. In all other cases, a party may amend its pleading only with the opposing party’s written consent or the court’s leave. The court should freely give leave when justice so requires. Fed. R. Civ. Pr. 15(a)(2). Justice here so requires. Cases are legion that the decision to grant leave is within the discretion of the trial court. “It is within the sound discretion of the district court to grant or deny leave to amend.” Bautista v. CytoSport, Inc., No. 15-CV-9081, 2016 WL 7192109 (S.D.N.Y. Dec. 12, 2016); Temple v. Hudson View Owners Corp., No. 16-CV-3203, 2016 WL 6993846 (S.D.N.Y. Nov. Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 13 of 18 6 28, 2016) (both citing McCarthy v. Dun & Bradstreet Corp., 482 F. 3d 184, 200 (2d Cir. 2007). This Court clearly has broad discretion to grant Uniquest’s request for leave. And, leave should be freely given. See Cortec Industries, Inc. v. Dubin Clark & Co., 949 F.2d 42 (2d Cir. 1991); Elliot-Leach v. N.Y.C. Dep’t of Educ., 15 Civ. 5982, 2016 WL 4446147 (E.D.N.Y. Aug. 8, 2016). No reason exists to deny leave here. One commentator has explained the policy underlying Rule 15: Rule 15 reflects two of the most important policies of the federal rules. First, the rule’s purpose is to provide the maximum opportunity for each claim to be decided on the merits rather than on procedural technicalities. . . . Second, Rule 15 reflects the fact that the federal rules assign the pleadings the limited role of providing notice of the nature of the pleader’s claim or defense and the transaction, event, or occurrence that has been called into question. 6 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1006 (3d ed. 1998). This case should be decided on its merits. The United States clearly had notice concerning the nature of the controversy and the various ways the ESD Incentive Grants could be excluded from income, including the theories raised in the Amended Complaint. As mentioned, the United States directly addresses the substance of Uniquest’s proposed amendments in its Brief in Support of its Motion for Summary Judgment by arguing that I.R.C. § 118 does not apply to Uniquest, because it is not a corporation and that Uniquest cannot meet the relevant tests of a “contribution to capital” exclusion. Moreover, by seeking penalties, the United States urges the Court to analyze the taxation issues at the level of the individual taxpayers to whom Uniquest’s items of income, gain, loss, and deduction flow. Uniquest seeks to amend its Complaint, in order to enable the Court to decide the issues on their merits, and not on a procedural technicality. The United States cannot claim prejudice as a result of the proposed Amended Complaint. Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 14 of 18 7 POINT II. UNIQUEST HAS DEMONSTRATED ITS ENTITLEMENT TO SUMMARY JUDGMENT. Federal Rule of Civil Procedure 56 provides that summary judgment should be granted if the moving party establishes “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” The Court should grant summary judgment if, after considering the evidence in the light most favorable to the nonmoving party, the court finds that no rational jury could find in favor of the party. Yin v. NFTA, 188 F. Supp. 3d 259, 268 (W.D.N.Y. 2016) (citations omitted). Once the moving party has met its burden, the opposing party “must do more than simply show that there is some metaphysical doubt as to the material facts. . . . The nonmoving party must come forward with specific facts showing that there is a genuine issue for trial.” Id. (citations omitted). “The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment . . .” Id. (citations omitted). Here, there are no material facts remaining in dispute. The motions present pure legal issues. As the following Points will demonstrate, Plaintiffs are entitled to summary judgment, and the United States is not. POINT III. AS A MATTER OF LAW, THE ESD INCENTIVE GRANTS ARE NOT INCOME TO UNIQUEST Plaintiffs primarily contend that the common law inducement doctrine permits Uniquest to exclude the ESD Incentive Grants from income at the partnership level. For Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 15 of 18 8 unknown reasons, the United States does not address the application of the inducement doctrine to exclude the ESD Incentive Grants from Uniquest’s income. Given that Uniquest pleaded the application of the inducement doctrine in the original Complaint at ¶¶ 48–50, the United States’ failure to address the issue in its Motion for Summary Judgment is curious. In any event, Uniquest is entitled to exclude the ESD Incentive Grants from income under the inducement doctrine. This longstanding judicial doctrine excludes contributions from gross income, much like a reduction in purchase price, when they are intended by both the payer and recipient to induce the recipient to enter into a specific transaction. See, e.g., Freedom Newspapers, Inc. v. Comm’r, T.C.M. 1977-429. In this case, the facts and supporting documentation demonstrate that both New York State and Uniquest intended the ESD Incentive Grants to induce Uniquest to undertake the construction of the Avant on the site of the abandoned Dulski building. The ESD Incentive Grants are excludable from Uniquest’s income under the inducement doctrine. Common law has long permitted the exclusion from gross income of contributions intended to induce a taxpayer to enter into certain transactions. Inducement payments are generally treated as purchase-price reductions excluded from gross income, but they require the taxpayer to correspondingly reduce its cost basis in the acquired asset. The relevant cases do not limit this treatment to corporate entities. The first of these cases, Brown v. Commissioner, looked at, among other issues, whether a partnership could use the cost basis of its securities, as reduced by certain purchase price adjustments, for purposes of determining the taxable distributive income of the partners. 10 B.T.A 1036 (1928). In Brown, the majority shareholder of a coal company wanted a partnership controlled by Brown, considered to be Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 16 of 18 9 friendly to the company’s interests, to purchase a minority interest in the company. Id. Believing the stock price to be too high, Brown (through his partnership) was reluctant to agree to the purchase. Id. Consequently, the majority shareholder agreed to pay the partnership a percentage of certain back salary the majority shareholder would be owed if the partnership purchased the shares at the current stock price, which it ultimately did. Id. In deciding that the payments by the majority shareholder to the partnership constituted a reduction in the partnership’s cost of the shares, rather than income to the partnership, the Court found that, “in the minds of both parties, [the payment] represented a reduction of the investment” by the partnership. Id. The two contracts—concerning the purchase of the securities and the cash payments to the partnership—were viewed together as one transaction, thereby reducing the partnership’s cost basis of the stock in the coal company. Although the Internal Revenue Service (“IRS”) did not acquiesce to this result, it has been cited as support in subsequent cases. See, e.g., Freedom Newspapers, T.C.M. 1977-429. Moreover, in an Action on Decision, declaring its non-acquiescence to Brown almost fifty years after it was decided, the IRS only questioned the application of the inducement doctrine to the facts in that case, rather than the existence or propriety of the doctrine itself. I.R.S. AOD-1976-435 (Nov. 23, 1976). Since Brown was decided, both courts and the IRS have applied the inducement doctrine in a variety of contexts. See, e.g., Fed. Bulk Carriers v. Comm’r, 66 T.C. 283 (1976) (holding that payments to a purchaser constituted a purchase price reduction because the payments were “intimately tied” to the purchase of certain securities). Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 17 of 18 10 In Freedom Newspapers, the Tax Court confirmed that the purchase price adjustment principle in Brown applied to third-party inducement payments. T.C.M. 1977-429. There, the issue involved whether a broker’s payment to a purchaser of certain newspapers to induce the purchaser to complete the proposed transaction served to reduce the purchase price of the newspapers and did not constitute income to the purchaser. Id. As part of a package deal for a number of different Florida newspapers, the seller wanted to include one newspaper that the taxpayer, Freedom Newspapers, did not consider a good investment. Id. To induce Freedom to agree to the package deal as offered, the broker of the deal promised to either find an acceptable buyer for the unwanted newspaper or pay the taxpayer $100,000. Id. One year later, Freedom sold the unwanted paper at a substantial loss. Id. On its tax return that year, Freedom treated the broker’s payment as a reduction in its cost basis in the paper, decreasing the amount of its reportable loss. Id. Citing Brown, the Tax Court held that the $100,000 payment represented an adjustment to Freedom’s purchase price—i.e. a reduction in Freedom’s basis in the paper. Id. The Tax Court based its decision on several factors. First, it found that there was a clear connection between the transactions; the $100,000 payment could not be separated from the contract to purchase the newspapers. Id. The broker’s promise of payment to Freedom was intended by both parties to induce Freedom to enter into the package deal for the Florida newspapers. Second, but for the inducement payment, the purchase contract would not have been completed. Id. The inducement payment was agreed to just one day prior to the completion of the sale, making it “obvious that the agreement with [the broker] was intended to and succeeded in inducing petitioner’s purchase….” Id. Case 1:15-cv-00638-EAW-LGF Document 41-5 Filed 03/21/17 Page 18 of 18