Gragg et al v. United States of America et al

Filing 31

SECOND ORDER by Judge Yvonne Gonzalez Rogers DENYING CROSS-MOTIONS FOR SUMMARY JUDGMENT ; 25 Motion for Summary Judgment and 27 . The Court VACATES the hearing set for June 11, 2013. (fs, COURT STAFF) (Filed on 6/10/2013)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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CHARLES GRAGG and DELORES GRAGG,

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Plaintiff(s),

United States District Court
Northern District of California

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Case No.: 12-CV-03813 YGR
SECOND ORDER DENYING CROSS-MOTIONS
FOR SUMMARY JUDGMENT

vs.

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UNITED STATES OF AMERICA et al.,

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Defendant(s).

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Plaintiffs Charles and Delores Gragg filed this taxpayer suit to recover a refund for taxes

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alleged to have been erroneously assessed for losses from rental real estate activity. In their

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Complaint, Plaintiffs allege that under 26 U.S.C. § 469 Ms. Gragg is a real estate professional and

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deductions for real estate rental losses should not have been disallowed as passive activity losses.

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The parties have filed their second cross-motions for summary judgment, again asking the

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Court to make an advisory ruling on a legal issue, which the Court will again decline to provide—

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whether the rental activities of a real estate professional are subject to the material participation

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requirements of 26 U.S.C. § 469 and/or 26 C.F.R. § 1.469-5T.1 The Court declined to decide this

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legal issue devoid of the factual context of this case, denied the parties’ first set of cross-motions for

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summary judgment, and provided the parties an opportunity to refile their motions.2

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Although the government has reframed the issue as whether the Plaintiffs are entitled to a tax
refund, it seeks the same advisory ruling on whether a real estate professional is subject to the
material participation requirement.
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Plaintiffs have submitted substantially the same motion that the Court already considered and
denied. Plaintiffs’ motion is DENIED, again.

Having carefully con
c
nsidered the papers subm
mitted and th evidence i the record the Court
he
in
d,

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find that there still are insu
ds
s
ufficient facts in the reco rd to determ whether any party is entitled to a
s
mine
r
s

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judg
gment as a matter of law Determini whether a tax was er
m
w.
ing
rroneously as
ssessed requ
uires

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cons
sideration of inter alia, the specific reason the t was asses
f,
tax
ssed. Becau the partie failed to
use
es

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prov this and other basic facts of this case, the Co DENIES both motio 3
vide
d
s
ourt
S
ons.

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I.

BACKG
GROUND
Plaintiff Charles an Delores Gragg are a m
fs
nd
G
married coup that filed joint tax ret
ple
turns for tax

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year 2006 and 2007. Acco
rs
ording to the Complaint, “Delores Gr
ragg is a full
l-time licens real estat
sed
te

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agen who has been providin professio real esta services i Alameda a Contra C
nt
b
ng
onal
ate
in
and
Costa County

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sinc 1996. Mrs. Gragg ofte works 7 days a week and perform activities which inclu but are no
ce
en
d
ms
ude
ot

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United States District Court
Northern District of California

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limi to: 1) selling, renting or leasing property; 2) offering to do those activities 3) ne
ited
g,
g
)
egotiating th
he

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term of a real estate contrac 4) listing of real prop
ms
e
ct;
perty for sale lease, of ex
e,
xchange; an 5)
nd

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proc
curing prospective seller and purcha
rs
asers.” (Com
mplaint ¶ 9.) Based upo these real estate
)
on

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activ
vities, the pa
arties agree that Mrs. Gragg qualifies as a “real e
t
s
estate profes
ssional” unde the
er

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Internal Revenu Code, 26 U.S.C. § 469
ue
U
9(c)(7)(B).
In both the 2006 and 2007 tax ye
t
d
ears, Plaintif claimed d
ffs
deductions f losses fro rental rea
for
om
al

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ate
O
06
eral
,
claimed $22,553.00 as a
esta activity. On their 200 Joint Fede Income Tax Return, Plaintiffs c

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net loss “from all rental real estate activ
l
a
l
vities in whic [Mrs. Gra
ch
agg] material participa under the
lly
ated

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pass activity loss rules.” (Dkt. No. 15-1 at 12-13 On their 2007 Joint F
sive
3.)
Federal Inco Tax
ome

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Retu Plaintiff claimed $2
urn,
fs
20,390.00 as a net loss “
s
“from all ren real estat activities in which
ntal
te

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[Mr Gragg] materially par
rs.
rticipated und the passi activity l
der
ive
loss rules.” (Id. at 31-32
2.)

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ernal Revenu Service (“
ue
“IRS”) exam
mined Plaintif Joint Federal Incom Tax
ffs’
me
The Inte

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Retu for the 2006 and 20 tax years and disallo
urns
2
007
s
owed the rent real estat deductions Neither th
tal
te
s.
he

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Com
mplaint nor the parties’ briefs identif the specifi reason tha these dedu
t
b
fy
fic
at
uctions were disallowed.
e
.

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Afte careful ins
er
spection of the exhibits attached to th governm
t
a
the
ment’s first m
motion for sum
mmary

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Pur
rsuant to Fede Rule of Civil Procedu 78(b) and Civil Local R 7-1(b), th Court finds this motion
eral
C
ure
Rule
he
appr
ropriate for de
ecision withou oral argum
ut
ment. Accordi
ingly, the Cou VACATES the hearing s for June 11,
urt
S
set
2013
3.
2

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judg
gment, the Court found the following explanatio n in the IRS notices of deficiency for
C
t
g
S’s
f

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disa
allowing the claimed loss from ren real estat activities:
ses
ntal
te
Passive losses and cr
l
redits can be offset by p assive incom
e
me[.] … Sin your losses
nce
from suc activities were in exce of the pa
ch
ess
assive incom the specia allowance and
me,
al
e,
the phase-in rule, the excess loss has been de
e
s
enied. … R
Rental activit of any k
ties
kind,
regardless of materia participati are cons
al
ion,
sidered passi activities unless the
ive
s
ments of sect
tion 469(c)(7 of the Inte
7)
ernal Revenu Code are met in tax y
ue
years
requirem
beginnin after Dece
ng
ember 31, 19
993.

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(Dk Nos. 12-1 at 19-20, 12 at 11, 15-1 at 53-54.)
kt.
2-2
)
C
efund for tax years 2006 and 2007.4 The parties do not
x
The Graggs filed a Claim for Re

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iden
ntify the spec
cific reason on which the Graggs bas their refu request; after sifting through the
o
e
sed
fund
;
g
e

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reco the Cour noticed tha both Claim for Refun provide th following explanation “Taxpaye
ord,
rt
at
ms
nd
he
g
n:
er

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United States District Court
Northern District of California

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is a real estate professional and as such is not subjec to the Inte
p
a
ct
ernal Revenu Code’s pa
ue
assive loss

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itations whic the IRS di
ch
isallowed.” (Claims for Refund for Tax Years 2
r
2006 & 2007 at Dkt. No
7,
o.
limi

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15-1 at 76 & 77 (all capital letters in or
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riginal).) Ac
ccording to t Complain both claim for a
the
nt,
ms

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refu “were rej
und
jected.” (Co
omplaint ¶ 4.) The partie have prov
vided no fact or evidenc of the
ts
ce
es

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reas
son(s) the IR disallowed the claims for refunds. Thereafter the Graggs filed this law
RS
d
.
r
wsuit seekin
ng

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a ref
fund.

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II.

DISCUS
SSION
Congress has provid taxpayers with a caus of action to recover in
ded
s
se
nternal reven taxes
nue

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alleg to have been erroneo
ged
b
ously or illeg
gally assesse or collect
ed
ted. See 26 U
U.S.C. § 742
22(a).5 As

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the party seekin a tax refun Plaintiffs bear the bu
p
ng
nd,
s
urden to show that the as
w
ssessment wa
as

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inco
orrect—mean
ning “arbitra excessiv or without foundation Palmer v U.S. I.R.S., 116 F.3d
ary,
ve
t
n.”
v.

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1309 1312 (9th Cir. 1997); see Davis v. C.I.R., 394 F.3d 1294, 1298 n.2 (9t Cir. 2005) (“The
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h
.
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th

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taxp
payer bears the burden of showing th he or she meets every condition o a tax exem
t
f
hat
y
of
mption or

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dedu
uction.”). There is a pre
esumption of correctness that attache to notices of deficienc issued by
f
s
es
cy

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Al
lthough the government does not cha
g
allenge the (m
material) fac that the G
ct
Graggs paid th tax
he
asse
essment, the parties have not identified such evid
e
dence in the record. The evidence proffered by
e
the government in support of the fact of payment is that the Gra
g
o
f
aggs have req
quested a ref
fund.
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Pla
aintiffs’ Com
mplaint incor
rrectly ident
tifies this sta
atute as the b
basis for the Court’s juris
sdiction. Th
he
Cou has jurisd
urt
diction pursu to 28 U.S.C. § 1346.
uant

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the IRS. Palmer, supra, 116 F.3d at 1312; Cook v. United State 46 Fed. C 110, 114 (Fed. Cl.
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6
es,
Cl.

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2000 (“presump
0)
ption of corr
rectness ‘is a procedural device whic requires t taxpayer to come
l
ch
the

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forw
ward with en
nough eviden to support a finding c
nce
contrary to t Commiss
the
sioner’s dete
ermination.’”
”)

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(quo
oting Rockwell v. Commissioner, 512 F.2d 882, 885 (9th Cir cert. deni 423 U.S 1015
2
r.),
ied,
S.

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(197
75)). To be entitled to th presumpt
his
tion, howeve the gover
er,
rnment must come forwa with a
t
ard

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basi for its asse
is
essment. Un
nited States v. Janis, 428 U.S. 433, 4 (1976) (a
v
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442
assessments that are

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“nak and with
ked
hout any fou
undation” are not presum correct); Palmer, sup 116 F.3d at 1312
e
med
pra,

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(“Co
ommissioner deficienc determina
r’s
cy
ations and as
ssessments fo unpaid tax are norm
for
xes
mally entitled
d

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to a presumption of correctn so long as they are s
n
ness
supported by a minimal factual foun
y
ndation”).
A.

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United States District Court
Northern District of California

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SUMMARY JUDGMENT STANDARD
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Both par
rties have fil a motion for summar judgment. Summary j
led
ry
.
judgment is appropriate

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whe there is no genuine dis
en
o
spute as to any material fact and the moving par is entitled to judgmen
a
e
rty
d
nt

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as a matter of la Fed. R. Civ. P. 56(a) A party se
aw.
C
).
eeking summ
mary judgme bears the initial
ent
e

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burd of inform
den
ming the cou of the bas for its mo
urt
sis
otion, and of identifying those portio of the
f
ons

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plea
adings and di
iscovery resp
ponses that demonstrate the absence of a genuin issue of m
d
e
e
ne
material fact.

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Celo Corp. v. Catrett, 477 U.S. 317, 323 (1986).
otex

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B.

ANALYSIS

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For the majority of the material facts in this case, the par
m
t
rties have no identified the factual
ot

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basi for their en
is
ntitlement to a judgment as a matter of law or id
o
t
dentified the evidence tha
at

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dem
monstrates the absence of a genuine issue of fact. Before the Court can d
f
.
decide wheth a tax has
her

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been erroneousl assessed (or if Plaintif are entitle to a tax re
n
ly
ffs
ed
efund due to an erroneou assessed
o
usly
d

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tax), the parties must provid the Court with the ma
de
aterial facts o this case, including th basis for
of
he

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the assessment. As set forth in the Back
a
h
kground sect
tion, Part I a
above, the pa
arties have n provided
not

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the specific factu basis for the IRS’s decision to as
s
ual
r
d
ssess the tax the basis fo Plaintiffs’ Claim for
x,
or
’

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Refu the basi for the IRS’s denial of the Claim f Refund, or identified the undispu evidenc
und,
is
f
for
d
uted
ce

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of sa
ame. Witho knowing the specific factual cont
out
text of the ca the parti are askin the Court
ase,
ies
ng

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to is
ssue an advis
sory opinion based on a hypothetica set of facts
n
al
s.

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4

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The real issue the pa
arties want th Court to d
he
decide is wh
hether a hypo
othetical real estate
l

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agen rental re estate act
nt’s
eal
tivity should be classified as non-pas
d
ssive activity for purpose of Section
y
es
n

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469 of the Intern Revenue Code. Neit
nal
e
ther party ha shown tha if the ques
as
at
stion is answ
wered in their
r

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favo then they will be entit to judgm as a ma
or,
tled
ment
atter of law. The Court p
previously d
declined to

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issu an advisor opinion on this issue and declines to do so aga here.
ue
ry
n
a
ain

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III.

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United States District Court
Northern District of California

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CONCL
LUSION
For the reasons set forth above, the parties’ C
r
fo
t
Cross-Motio for Summ
ons
mary Judgm are
ment

DEN .
NIED
der
tes
N
This Ord Terminat Docket Numbers 25 & 27.
IT IS SO ORDERED.
Date: June 10, 2013

__
__________
___________
__________
__________
YVON GONZAL ROGERS
NNE
LEZ
UNITED ST
TATES DISTR
RICT COURT JUDGE
T

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