Interior Glass Systems, Inc. v. United States Of America

Filing 84

ORDER denying 74 Motion to Alter the Judgment and for New Trial. Signed by Judge Edward J. Davila on 3/28/2017. (ejdlc1S, COURT STAFF) (Filed on 3/28/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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INTERIOR GLASS SYSTEMS, INC.,

Case No. 5:13-cv-05563-EJD

Plaintiff,
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v.
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UNITED STATES OF AMERICA,

United States District Court
Northern District of California

Defendant.

ORDER DENYING PLAINTIFF’S
MOTION “UNDER RULE 59 TO ALTER
THE JUDGMENT AND FOR NEW
TRIAL”
Re: Dkt. No. 74

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Plaintiff Interior Glass Systems, Inc. (“Interior Glass”) brings the instant motion “under

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Rule 59 to alter the judgment and for new trial” (Dkt. No. 74) after the court entered a judgment

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partially in its favor within this action for recovery of tax penalties. Defendant United States of

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America (the “Government”) opposes the request.

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Federal jurisdiction arises pursuant to 28 U.S.C. § 1346. The court has carefully

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considered the parties’ pleadings and the record in conjunction with the arguments made at the

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hearing on March 23, 2017. Because Interior Glass has not presented a viable basis for post-

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judgment relief, its motion will be denied for the reasons that follow.

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I.

BACKGROUND
The court does not repeat the extensive factual recitation contained in the summary

judgment order (Dkt. No. 70), but mentions some basic background information for context.
Interior Glass is a glass-installation company located in San Jose, and is owned by Mike

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Yates. In 2012, the Internal Revenue Service (“IRS”) imposed a $40,000 penalty on Interior Glass

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for failing to disclose its participation in two programs involving tax deductions of life insurance

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Case No.: 5:13-cv-05563-EJD
ORDER DENYING PLAINTIFF’S MOTION “UNDER RULE 59 TO ALTER THE
JUDGMENT AND FOR NEW TRIAL”

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premiums: the Insured Security Program (“ISP”) and the group term life insurance plan (“GTLP”)

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offered by the Association for Small, Closely-Held Business Enterprises. Both of those programs

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were marketed to Interior Glass by the same individual, Lawrence Cronin.

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Interior Glass participated in the ISP in 2008 and in the GTLP in 2009, 2010 and 2011.
The IRS imposed a $10,000 penalty under 26 U.S.C. § 6707A for each of those tax years because

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it considered the ISP and the GTLP as “listed transactions” subject to Notice 2007-83. In relevant

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part, Notice 2007-83 targets “certain trust arrangements claiming to be welfare benefit funds and

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involving cash value life insurance policies” which were “being promoted to and used by

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taxpayers to improperly claim federal income and employment tax benefits.” Notice 2007-83

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applies to “listed transactions,” which are defined as “any transaction” having four enumerated

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United States District Court
Northern District of California

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elements, or “any transaction that is substantially similar to such a transaction.”

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In May, 2013, Interior Glass paid the $40,000 penalty and interest of $430.12. It then filed
an unsuccessful refund claim with the IRS, and commenced the instant action in December 2013.
Before this court, Interior Glass and the Government moved for summary judgment or

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partial summary judgment. Dkt. Nos. 30, 31, 36. The court held an initial hearing on the motions

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but requested supplemental briefing from both sides. Dkt. Nos. 59, 61. Another motion hearing

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was subsequently held, after which Interior Glass submitted an additional brief. Dkt. No. 66.

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On August 12, 2016, the court issued a written order (1) granting the Government’s first

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motion for partial summary judgment, (2) granting in part and denying in part the Government’s

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second motion for summary judgment, and (3) granting in part and denying in part Interior Glass’

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motion for summary judgment. Because the Government withdrew opposition to a refund of the

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2008 penalty, summary judgment was granted to Plaintiff on that issue. However, the court

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determined the Government was entitled summary judgment for the remaining years’ penalties

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based on a finding that the GTLP was “substantially similar” to a “listed transaction” and thereby

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subject to Notice 2007-83. In accordance with these determinations, a $10,000 judgment was

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entered in favor of Interior Glass. Dkt. No. 71.

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Case No.: 5:13-cv-05563-EJD
ORDER DENYING PLAINTIFF’S MOTION “UNDER RULE 59 TO ALTER THE
JUDGMENT AND FOR NEW TRIAL”

The instant motion followed.

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II.

LEGAL STANDARD
Despite its title as one to alter the judgment as well as one for “new trial,” Interior Glass’

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motion can only arise under Federal Rule of Civil Procedure 59(e) because no trial occurred in this

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action. Merrill v. Cty. of Madera, 389 Fed. Appx. 613, 615 (9th Cir. 2010) (“[A] Rule 59(a)

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motion for new trial is not available on claims or causes of actions for which Plaintiffs never

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received a trial.”); United States v. 1982 Sanger 24’ Spectra Boat, 738 F.2d 1043, 1046 (9th Cir.

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1984) (“[T]he moving party’s label for its motion is not controlling . . . . Rather, the court will

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construe it, however styled, to be the type proper for the relief requested.”). The argument that
Rule 59(a)(2) applies under these circumstances is unpersuasive. See Taylor v. Knapp, 871 F.2d

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United States District Court
Northern District of California

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803, 805 (9th Cir. 1989) (holding that “reconsideration of summary judgment is appropriately

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brought under . . . Rule 59(e)”); see also Huerta v. AT&T Umbrella Ben. Plan No. 1, No. 3:11-cv-

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01673-JCS, 2012 U.S. Dist. LEXIS 178353, at *6-7, 2012 WL 6569369 (N.D. Cal. Dec. 17, 2012)

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(“Because the Court never held a trial, but rather granted summary judgment in favor of

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Defendant, a request for a “new trial” pursuant to Rule 59(a)(2) is procedurally improper.”).

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“In general, there are four basic grounds upon which a Rule 59(e) motion may be granted:

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(1) if such motion is necessary to correct manifest errors of law or fact upon which the judgment

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rests; (2) if such motion is necessary to present newly discovered or previously unavailable

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evidence; (3) if such motion is necessary to prevent manifest injustice; or (4) if the amendment is

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justified by an intervening change in controlling law.” Allstate Ins. Co. v. Herron, 634 F.3d 1101,

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1111 (9th Cir. 2011).

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Importantly, a Rule 59(e) motion has certain limitations. Though it permits the district

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court to alter or amend a judgment, it “‘may not be used to relitigate old matters, or to raise

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arguments or present evidence that could have been raised prior to the entry of judgment.’” Exxon

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Shipping Co. v. Baker, 554 U.S. 471, 485 n.5 (2008). Moreover, relief under Rule 59(e) is

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“extraordinary” and “should be used sparingly.” McDowell v. Calderon, 197 F.3d 1253, 1255 n.1

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Case No.: 5:13-cv-05563-EJD
ORDER DENYING PLAINTIFF’S MOTION “UNDER RULE 59 TO ALTER THE
JUDGMENT AND FOR NEW TRIAL”

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(9th Cir. 1999); Weeks v. Bayer, 246 F.3d 1231, 1236 (9th Cir. 2001) (explaining that a party

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must overcome a “high hurdle” to obtain relief under Rule 59(e) since only “highly unusual

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circumstances” will justify its application).

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III.

DISCUSSION

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Interior Glass argues for relief under Rule 59(e) because it believes the court

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“misapprehended some of the facts presented and has made an error of law” in the summary

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judgment ruling which resulted in the judgment. As framed under the relevant authority, this

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motion primarily turns on whether the court made a “manifest” error of law or fact. Interior Glass

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has not shown that the court did so.

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To begin, the motion is procedurally deficient. Interior Glass cannot rely on arguments

United States District Court
Northern District of California

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and evidence it submitted in connection with the extensive summary judgment briefing that

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resulted in the summary judgment order and judgment. Plaintiff previously argued that § 6707A

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was unconstitutionally vague or overbroad because the phrase “substantially similar” was not

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sufficiently defined, such that Notice 2007-83 could not be enforced without specific reference to

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the four “elements” described therein. In connection with that argument, Interior Glass submitted

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a 2010 IRS workpaper and the Form 886A it received. The court reviewed those documents

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during its assessment of the vagueness argument, but rejected them as evidence that § 6707A was

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constitutionally problematic or that Notice 2007-83 was incapable of being enforced absent strict

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adherence to the elements. Dkt. No. 70, at 11:7-11 (“Interior Glass also speculates the IRS itself

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could not determine whether the GTLP was subject to penalty given the delay between its receipt

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of information and the issuance of a penalty notice. The court observes, however, that whether a

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statute is void for vagueness does not turn on whether the IRS applies or interprets § 6707A

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consistently, or how long it takes an agency to render a penalty decision.”); 14:18-20 (recognizing

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that a “transaction may be substantially similar to a listed transaction even though it involves

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different entities or uses different Internal Revenue Code provisions.”).

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Interior Glass resurrects the vagueness argument and again submits the 2010 IRS
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Case No.: 5:13-cv-05563-EJD
ORDER DENYING PLAINTIFF’S MOTION “UNDER RULE 59 TO ALTER THE
JUDGMENT AND FOR NEW TRIAL”

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workpaper and the Form 886A with the instant motion. But because Rule 59(e)’s purpose “is not

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to give an unhappy litigant one additional chance to sway the judge,” another examination of

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Interior Glass’ presentation by this court is unwarranted. Garcia v. Biter, 195 F. Supp. 3d 1131,

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1133 (E.D. Cal. 2016) (internal quotation omitted; emphasis preserved); accord Backlund v.

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Barnhart, 778 F.2d 1386, 1388 (9th Cir. 1985) (affirming denial of Rule 59(e) motion which

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“presented no arguments that had not already been raised in opposition to summary judgment”);

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Defenders of Wildlife v. Browner, 909 F. Supp. 1342, 1351 (D. Ariz. 1995) (“A motion for

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reconsideration should not be used to ask a court ‘to rethink what the court had already thought

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through - rightly or wrongly.’”).

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Similarly, Interior Glass cannot prevail under Rule 59(e) with new arguments or evidence

United States District Court
Northern District of California

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it could have submitted previously, but did not. “A Rule 59(e) motion may not be used to raise

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arguments or present evidence for the first time when they could reasonably have been raised

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earlier in the litigation.” Kona Enters., Inc. v. Estate of Bishop, 229 F.3d 877, 890 (9th Cir. 2000).

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Here, the instant motion includes statements and documents which were not raised in Interior

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Glass’ original summary judgment briefing. In particular, Interior Glass has now introduced

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additional deposition testimony from the IRS agent who conducted the audit and the regulatory

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history of 26 C.F.R. § 1.6011-4, which it uses in an effort to define the history of enforcement and

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intent of the IRS. Notably, however, Interior Glass makes no attempt to explain why this

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additional information and argument - none of which is new - could not have been presented in

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any of its several prior filings. Consequently, it is improper for the court to consider it now. See

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Sch. Dist. No. 1J v. AC&S, Inc., 5 F.3d 1255, 1263 (9th Cir. 1993) (“The overwhelming weight of

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authority is that the failure to file documents in an original motion or opposition does not turn the

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late filed documents into ‘newly discovered evidence.’”).

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This motion also fails on its substance because Interior Glass’ arguments do not

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convincingly demonstrate that the judgment rests on a “manifest error of law or fact.” To succeed

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on that theory, a moving party “must set forth facts or law of a strongly convincing nature to

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Case No.: 5:13-cv-05563-EJD
ORDER DENYING PLAINTIFF’S MOTION “UNDER RULE 59 TO ALTER THE
JUDGMENT AND FOR NEW TRIAL”

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induce the court to reverse its prior decision.” Arteaga v. Asset Acceptance, LLC, 733 F. Supp. 2d

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1218, 1236 (E.D. Cal. 2010). “‘Mere doubts or disagreement about the wisdom of a prior

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decision’ is insufficient to warrant granting a Rule 59(e) motion.” Garcia, 195 F. Supp. 3d at 1133

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(quoting Campion v. Old Repub. Home Protection Co., Inc., No. 09-CV-00748-JMA(NLS), 2011

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U.S. Dist. LEXIS 54104, at *5, 2011 WL 1935967 (S.D. Cal. May 20, 2011)). “Arguments that a

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court was in error on the issues it considered should be directed to the court of appeals.” Defs. of

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Wildlife, 909 F. Supp. at 1351.

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At bottom, Interior Glass asserts that an arrangement is “substantially similar” to a “listed
transaction” only if it exhibits each of the four elements listed in Notice 2007-83. Based on that
contention, Interior Glass concludes the GTLP was not subject to Notice 2007-83’s reporting

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United States District Court
Northern District of California

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requirement because it is neither a trust nor an “other fund described in § 419(e)(3) that is

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purportedly a welfare benefit fund.” This court, however, disagrees with Interior Glass’

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reasoning because its interpretation renders Notice 2007-83’s “substantially similar” language

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superfluous and meaningless. Pursuant to its plain language, Notice 2007-83 applies not just to

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“[a]ny transaction” that has all of the listed elements, but also to “any transaction that is

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substantially similar to such a transaction.” And as the court explained in the summary judgment

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order, the phrase “substantially similar” has a meaning; it encompasses “any transaction that is

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expected to obtain the same or similar types of tax consequences and that is either factually similar

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or based on the same or similar tax strategy.” 26 C.F.R. § 1.6011-4(c)(4). Applying this

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definition in conjunction with the remainder of Notice 2007-83, the court determined that the

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GTLP was “substantially similar” to a “listed transaction,” and that Interior Glass was required to

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report its participation in the program to the IRS. Though Interior Glass may disagree with the

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court’s application of the law to facts in the record, that disagreement does not amount to

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“manifest error” under Rule 59(e).

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Interior Glass also raises the possibility that a mistake was made by the IRS, or that it was
targeted for penalties given circumstantial evidence purportedly showing a change in the IRS’
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Case No.: 5:13-cv-05563-EJD
ORDER DENYING PLAINTIFF’S MOTION “UNDER RULE 59 TO ALTER THE
JUDGMENT AND FOR NEW TRIAL”

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enforcement of Notice 2007-83. These suggestions are speculative. More importantly, they are

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irrelevant to this court’s task in relation to the issues presented because whether a penalty “should

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be excused is determined de novo without deference to the decision of the IRS.” Pac. Wallboard

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& Plaster Co. v. United States, 319 F. Supp. 2d 1187, 1188 (D. Or. 2004), aff’d, 2005 U.S. App.

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LEXIS 25393 (9th Cir. 2005); Wells Fargo & Co. v. United States, 91 Fed. Cl. 35, 75 (2010)

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(“The Court conducts a de novo review in tax refund suits.”). Here, the court conducted an

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independent review and reached its own conclusion, regardless of the IRS’ conduct, findings or

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commentary. Consequently, even if the court were to consider additional testimony from the IRS

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agent describing how she conducted the audit or the IRS comments included in § 1.6011-4’s

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regulatory history, such evidence would not change the decision on summary judgment.
In sum, Interior Glass has not presented a valid basis for the extraordinary relief it seeks.

United States District Court
Northern District of California

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For that reason, its Rule 59(e) motion will be denied.

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IV.

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ORDER
Interior Glass’ Motion “under Rule 59 to Alter the Judgment and for New Trial” (Dkt. No.

74) is DENIED.

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IT IS SO ORDERED.
Dated: March 28, 2017
______________________________________
EDWARD J. DAVILA
United States District Judge

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Case No.: 5:13-cv-05563-EJD
ORDER DENYING PLAINTIFF’S MOTION “UNDER RULE 59 TO ALTER THE
JUDGMENT AND FOR NEW TRIAL”