Moreland et al v. Internal Revenue Service, Acting Commissioner

Filing 31

MEMORANDUM OPINION and ORDER DISMISSING CASE that it is ORDERED that plaintiffs are not entitle to a First-Time Home Buyers Credit for the 2009 tax year and that they have and take nothing; final judgment is entered in favor of defendnat and costs are taxed to plaintffs as more fully set out in order. Signed by Judge C Lynwood Smith, Jr on 4/17/2014. (AHI)

FILED
2014 Apr-17 PM 03:30
U.S. DISTRICT COURT
N.D. OF ALABAMA

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ALABAMA
NORTHWESTERN DIVISION
KEVIN D. MORELAND and
MELISSA MORELAND,
Plaintiff,
vs.
JOHN KOSKINEN,
Commissioner of Internal
Revenue Service,
Defendant.

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Civil Action No. CV-13-S-579-NW

MEMORANDUM OPINION AND ORDER
Plaintiffs, Kevin and Melissa Moreland, a married couple, filed suit against
John Koskinen, the Commissioner of the United States Internal Revenue Service
(“IRS”), seeking review of the IRS’s decision to deny them a First-Time Home Buyer
Credit (“FTHBC”) for tax year 2009.1 This case is before the court following a bench
trial on April 14, 2014. After reviewing all of the documentary evidence presented,
hearing the live testimony, and judging the credibility of the witnesses, the court
makes the following findings of fact and conclusions of law.
I. FINDINGS OF FACT
1

See doc. no. 1 (Complaint). The Complaint, which was filed on March 28, 2013, originally
named Steven T. Miller, who then was the Acting Commissioner of the Internal Revenue Service.
See id. ¶ 3. Since that date, John Koskinen replaced Steven T. Miller as Commissioner of the
Internal Revenue Service. Therefore, Koskinen is automatically substituted as a defendant in
Miller’s place. See Fed. R. Civ. P. 25(d).

A.

The Killen Property
Janie Moreland, who is the mother of plaintiff Kevin Moreland, purchased the

property located at 71 County Road 363 in Killen, Alabama, on May 1, 2007 (“the
Killen property”).2 Janie Moreland testified that she purchased the Killen property
with the intention of using it as an investment, but she has permitted Kevin Moreland
and his wife, plaintiff Melissa Moreland, to live in the home located on the property
rent-free since shortly after the date on which she purchased it.3
On April 30, 2010, Janie Moreland conveyed the Killen property to J. Noble
Holland and Donna S. Holland by Warranty Deed, “in consideration of the sum of
Ten and 10/100 ($10.00), and other good and valuable consideration.”4 On that same
date, plaintiff Kevin Moreland executed a “Real Estate Sales Contract” stating that
he agreed to purchase the Killen property (in which he and his wife then resided)
from Noble and Donna Holland for $85,000.00.5 The contract stated that the
Hollands would finance the entire purchase price;6 and, indeed, Kevin Moreland

2

Doc. no. 22 (“Plaintiffs Reply to United States Response to Statement of Principal Facts
and United States Proposed Stipulated Facts”) (hereinafter, “Stipulated Facts”) § B, at ¶¶ 1, 4. See
also Court’s Exhibit 1 (May 1, 2007 Warranty Deed).
3

Trial Transcript, at 125-28.

4

Defendant’s Exhibit 1 (April 30, 2010 Warranty Deed). See also Stipulated Facts § B, at

¶ 2.
5

Defendant’s Exhibit 2 (April 30, 2010 Real Estate Sales Contract). See also Stipulated
Facts § B, at ¶ 3.
6

Defendant’s Exhibit 2, ¶ 2.
2

granted Noble and Donna Holland a mortgage on the Killen property for $85,000.00
on June 8, 2010.7 Kevin Moreland agreed to make payments to Noble and Donna
Holland in the amount of $565.51 each month, with a final balloon payment of
$82,783.31 due on June 1, 2013.8 Noble and Donna Holland also executed a
Warranty Deed on June 8, 2010, conveying the Killen property to Kevin Moreland.9
Kevin Moreland presented photocopies of receipts indicating that he made a
total of four payments to Noble and Donna Holland for the Killen property: i.e., one
in each month from July to October of 2010.10 There is no evidence of any additional
payments,11 and it is undisputed that Kevin Moreland did not make the balloon
payment in June of 2013.12

7

Defendant’s Exhibit 8A (Real Estate Mortgage).

8

Defendant’s Exhibit 9 (June 8, 2010 Note with Balloon Payment). See also Defendant’s
Exhibit 7 (handwritten note); Trial Transcript, at 97-99 (explaining that Monty Allen, the real estate
agent who prepared the real estate contract for this transaction, also prepared this handwritten note
as an addendum to the contract); Defendant’s Exhibit 10 (Payment Calculator and Amortization
Schedule); Defendant’s Exhibit 11 (Addendum to Note); Stipulated Facts § B, at ¶ 5.
9

Defendant’s Exhibit 8.

10

Defendant’s Exhibit 27 (Receipts). See also Trial Transcript, at 13-16.

11

Both parties submitted as a trial exhibit a typed statement, signed by Donna Holland on
February 22, 2011, and stating, “I Donna Holland do certified [sic] that Kevin or Melissa Moreland
Have made their Mortgage payment of $565.51 on time since July 2010 to present.” Plaintiffs’
Exhibit 17; Defendant’s Exhibit 25. Kevin Moreland acknowledged during his trial testimony that,
despite what Donna Holland wrote in her statement, he had not made any payments since October
of 2010. Trial Transcript, at 18-19. Donna Holland acknowledged that her signature appeared on
the document, but she did not remember signing it, and she did not know what it meant. Id. at 114.
12

Stipulated Facts § B, at ¶ 7. See also Trial Transcript, at 12-13.
3

Noble Holland died on January 1, 2011,13 but neither Donna Holland nor any
other member of the Holland family has attempted to collect any additional payments
from Kevin Moreland, or to foreclose on the mortgage on the Killen property.14
Kevin and Melissa Moreland never moved away from the Killen property after
moving there in 2007; they have resided there continuously, from May 2007 until the
present date.15 There is no evidence that either Noble Holland or Donna Holland ever
stepped foot on the Killen property, much less took possession of it.
Kevin and Melissa Moreland claimed a First Time Home Buyer Credit on their
joint Form 1040X Amended Income Tax Return for 2009.16 The IRS denied the
credit on the basis that Kevin Moreland “[p]urchased the home from [his] mother
through a lender who never had full possession of the home prior to the sale date of
June 8, 2010.”17 The IRS also informed the Morelands that its research revealed “that
some type of relationship may have already existed between Janie Moreland and the
Hollands. That being the case, it is questionable whether or not this property was not
intentionally bought by the Hollands just to be sold to you two months later.”18
13

Trial Transcript, at 116.

14

Id. at 9, 17, 118-19.

15

Id. at 30.

16

Defendant’s Exhibits 4 & 5. See also Stipulated Facts § B, at ¶ 8.

17

Plaintiffs’ Exhibit 6 (April 4, 2011 letter from the IRS), at 1 (alterations supplied). See
also Stipulated Facts § B, at ¶ 9.
18

Plaintiffs’ Exhibit 14 (June 23, 2011 letter from the IRS), at 1. See also Stipulated Facts
4

B.

The Leighton Property
On April 30, 2010, Noble and Donna Holland were the owners of the property

located at 8355 Main Street in Leighton, Alabama (“the Leighton property”).19 The
house bearing that address had been owned and occupied by the Hollands for many
years, and it was their principal residence until 1996, when they moved into the house
on a contiguous parcel that bears the street address of 8335 Main Street. Noble and
Donna Holland conveyed the Leighton property to plaintiff Kevin Moreland’s
mother, Janie Moreland, by a Warranty Deed and Corrective Warranty Deed, both of
which were dated April 30, 2010.20 On that same date, Mollie Holland, the daughter
of Noble and Donna Holland, executed a Real Estate Sales Contract agreeing to
purchase the Leighton property from Janie Moreland for $85,000: the same price
Kevin Moreland had agreed to pay Noble and Donna Holland for the Killen
property.21 The contract stated that Janie Moreland would finance the entire purchase
price.22 Indeed, Janie Moreland executed a “Contract for Deed” on June 21, 2010,
agreeing to convey title to the Leighton property to Mollie Holland, but only after
§ B, at ¶ 9.
19

Stipulated Facts § B, at ¶ 10.

20

Defendant’s Exhibits 13 (April 30, 2010 Warranty Deed) & 14 (April 30, 2010 Corrective
Warranty Deed). See also Stipulated Facts § B, at ¶ 11. The deed was corrected to amend the legal
description of the property.
21

Defendant’s Exhibit 15 (April 30, 2010 Real Estate Sales Contract). See also Stipulated
Facts § B, at ¶¶ 12-13.
22

Defendant’s Exhibit 15, ¶ 2. Stipulated Facts § B, at ¶ 12.
5

Mollie Holland had paid her the total purchase price of $85,000, plus interest
computed at 7% per annum. Payment was to be made in monthly installments of
$565.51, with a balloon payment of $83.783.33 due on June 1, 2013.23
Mollie Holland did not make any payments, for the Leighton property to Janie
Moreland, including the balloon payment due on June 1, 2013.24 Even so, Janie
Moreland has not attempted to collect any payments from Mollie Holland, or to
otherwise enforce the terms of the June 21, 2010 Contract for Deed.25 There is no
evidence that Janie Moreland ever set foot upon the Leighton property, much less
assumed possession of it, after purportedly purchasing it from Noble and Donna
Holland.26 Moreover, Mollie Holland did not move into the house located on the
Leighton property after she purportedly purchased it from Janie Moreland.27 She
testified that it has been vacant since 1996.28
Mollie Holland claimed a First-Time Home Buyer Credit (“FTHBC”) on her

23

See Defendant’s Exhibit 19 (June 21, 2010 Contract for Deed); Defendant’s Exhibit 16
(Settlement Statement); Defendant’s Exhibit 17 (Amortization Table); Defendant’s Exhibit 18
(Handwritten Note Memorializing Payment Terms); Trial Transcript, at 97-99 (explaining that
Monty Allen, the real estate agent who prepared the real estate contract for this transaction, also
prepared this handwritten note as an addendum to the contract); Stipulated Facts § B, at ¶ 14.
24

Trial Transcript, at 133-35, 151-52.

25

Id.

26

Id. at 143.

27

Id. at 160-61.

28

Id. at 142.
6

Form 1040EZ Income Tax Return for 2010.29 The IRS granted her the credit, but she
decided in early 2014 to return all the money she received because, after further
consultation with the IRS, she determined she was not entitled to the credit and that
“it wasn’t right” for her to retain the money.30
II. CONCLUSIONS OF LAW
Kevin and Melissa Moreland have asked the court to order the IRS to “allow
[their] claim for the $8,000.00 first-time homebuyer credit under 26 U.S.C. 36 on
their 2009 Federal income tax return.”31 The statutory provision cited by the
Morelands provides, in pertinent part:
In the case of an individual who is a first-time homebuyer of a
principal residence in the United States during a taxable year, there shall
be allowed as a credit against the tax imposed by this subtitle for such
taxable year an amount equal to 10 percent of the purchase price of the
residence.
26 U.S.C. § 36(a). The statute defines the term “first-time homebuyer” as “any
individual if such individual (and if married, such individual’s spouse) had no present
ownership interest in a principal residence during the 3-year period ending on the date
of the purchase of the principal residence to which this section applies.” 26 U.S.C.
§ 36(c)(1). “[A]ny acquisition” of property can qualify as a “purchase” under the
29

Defendant’s Exhibits 23 & 24.

30

Trial Transcript, at 147-49, 156-62. See also Defendant’s Exhibit 30.

31

Doc. no. 1 (Complaint), at 10 (Demand for Relief, ¶ D).
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statute, but not if the property is “acquired from a person related to the person
acquiring such property (or, if married, such individual’s spouse).” 26 U.S.C. §
36(c)(3)(A)(i) (alteration and emphasis supplied). The credit generally may not
exceed $8,000, and it is only available for purchases of “a principal residence . . . on
or after April 9, 2008, and before May 1, 2010.” 26 U.S.C. §§ 36(b)(1)(A), 36(h)(1).
Hence, the two “Real Estate Sales Contracts” dated April 30, 2010.
The decision of the IRS to deny the Morelands the FTHBC was legally correct,
supported by the evidence, and cannot be disturbed by this court. The substance of
a transaction, not its form, governs when calculating the federal income tax
consequences of that transaction. As the Eleventh Circuit has stated,
economic substance determines what is income to a taxpayer and what
is not. See Caruth Corp. v. United States, 865 F.2d 644, 650 (5th Cir.
1989) (addressing, but rejecting on the case’s facts, the argument that
the donation of an income source to charity was a sham, and that the
income should be reattributed to the donor); United States v. Buttorff,
761 F.2d 1056, 1061 (5th Cir. 1985) (conveying income to a trust
controlled by the income’s earner has no tax consequence because the
assignment is insubstantial); Zmuda v. Comm’r, 731 F.2d 1417, 1421
(9th Cir. 1984) (similar). This economic-substance doctrine, also called
the sham-transaction doctrine, provides that a transaction ceases to merit
tax respect when it has no “economic effects other than the creation of
tax benefits.” Kirchman[ v. Commissioner of Internal Revenue,] 862
F.2d [1486,] 1492[ (11th Cir. 1989)]. Even if the transaction has
economic effects, it must be disregarded if it has no business purpose
and its motive is tax avoidance. See Karr[ v. Commissioner of Internal
Revenue], 924 F.2d [1018,] 1023 [(11th Cir. 1991)] (noting that
subjective intent is not irrelevant, despite Kirchman’s statement of the
8

doctrine); Neely v. United States, 775 F.2d 1092, 1094 (9th Cir. 1985);
see also Frank Lyon Co. v. United States, 435 U.S. 561, 583-84, 98 S.
Ct. 1291, 1303, 55 L. Ed.2d 550 (1978) (one reason requiring treatment
of transaction as genuine was that it was “compelled or encouraged by
business or regulatory realities”); Gregory v. Helvering, 293 U.S. 465,
469, 55 S. Ct. 266, 267, 79 L. Ed. 596 (1935) (reorganization
disregarded in part because it had “no business or corporate purpose”).
United Parcel Service of America, Inc. v. Commissioner of Internal Revenue, 254
F.3d 1014, 1018 (11th Cir. 2001) (alterations supplied). Courts do not regard “‘the
simple expedient of drawing up papers’ . . . as controlling for tax purposes when the
objective economic realities are to the contrary.” Frank Lyon Co., 435 U.S. at 573
(quoting Commissioner of Internal Revenue v. Tower, 327 U.S. 280, 291 (1946)).
In the present case, the paperwork related to all of the real estate conveyances
at issue appears to indicate, on its face, that Kevin Moreland purchased the Killen
property from Noble and Donna Holland, who are not related to him in any way. If
the technical form of that transaction were the only relevant consideration, Kevin and
Melissa Moreland might be entitled to the receive the FTHBC. However, when
viewed as a whole and in the light of all of the credible evidence, it is clear that the
substance of the transaction was very different from its form. In substance, Noble
and Donna Holland engaged in a property swap with Janie Moreland for the purpose
of making it appear that their respective children qualified for the First Time Home
Buyer Credit. There was no actual transfer of the subject properties. Noble and
9

Donna Holland never took possession of the Killen property, and Kevin and Melissa
Moreland never vacated it. Kevin and Melissa Moreland paid Noble and Donna
Holland only a very small percentage of the money they purportedly owe for the
property, and the Hollands never tried to collect from the Morelands. Similarly, Janie
Moreland never took possession of the Leighton property, and Mollie Holland did not
even move into that property after it had purportedly been transferred to her. Mollie
Holland never paid Janie Moreland anything for the Leighton property, and Janie
Moreland has never tried to collect anything from Mollie Holland.
Stated in terms that are most favorable to the parties involved, the only
substantive transactions that took place were the transfer of the Killen property from
mother (Janie Moreland) to son (Kevin Moreland), and the transfer of the Leighton
property from parents (Noble and Donna Holland) to daughter (Mollie Holland).
Stated less charitably, each family, in exchange for the sum of $8,000, concocted a
scheme to defraud the United States government via the Internal Revenue Service.
Under either construction, plaintiffs are not entitled to the First Time Home Buyer
Credit.
III. ORDER
In accordance with the foregoing, it is ORDERED, ADJUDGED, and
DECLARED that plaintiffs, Kevin Moreland and Melissa Moreland, are not entitled
10

to a First-Time Home Buyer Credit for the 2009 tax year, and that they have and take
nothing. Final judgment is entered in favor of defendant. Costs are taxed to
plaintiffs. The Clerk is directed to close this file.
DONE this 17th day of April, 2014.

______________________________
United States District Judge

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