Mihelick v. United States of America
ORDER granting 47 Motion for summary judgment. The Clerk is DIRECTED to enter judgment terminate any pending motions and deadlines, and close the file. Signed by Judge Sheri Polster Chappell on 10/11/2017. (LMF)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION
NORA L. MIHELICK,
Case No: 2:16-cv-741-FtM-38MRM
UNITED STATES OF AMERICA,
OPINION AND ORDER1
This matter comes before the Court on Defendant’s Motion for Summary Judgment
(Doc. 47) filed on June 30, 2017. Plaintiff filed a Response in Opposition (Doc. 53) on
July 28, 2017. For the reasons set forth below, the Motion is granted.
This case involves the 2009 tax liability of Plaintiff Nora L. Mihelick (Plaintiff or
Mihelick). In 2012, Mihelick submitted an amended 2009 income tax return to the Internal
Revenue Service (“IRS”), stating she is entitled to deduct $300,000 of her income for
2009 due to a payment she made to her ex-husband that year stemming from a settlement
of liability that arose during their marriage. The deduction would result in a refund of
$111,802 to Mihelick. The IRS denied the refund, resulting in this lawsuit wherein Plaintiff
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brings one claim for a tax refund under Sections 1341 of the Internal Revenue Code
(“IRC”), 26 U.S.C. §§ 1341. (Doc. 1).
UNDISPUTED MATERIAL FACTS
Nora Mihelick and Michael Bluso were married in 1978. During their marriage both
worked for Gotham Staple Co. (Gotham), which was founded by Bluso’s father and owned
by the Bluso family. Eventually Bluso became Gotham’s CEO and majority shareholder,
drawing a salary of approximately $1,000,000 a year. Mihelick held limited roles within
the company, drawing a significantly lower salary. While married, the couple filed joint
On September 3, 2004, Plaintiff filed for divorce. While the divorce was pending,
Pamela Bluso Barnes, who is Bluso’s sister and a minority shareholder in Gotham, sued
Bluso, Gotham, and others, alleging, among other things, that Bluso was excessively
compensating himself from 1999 to 2004 and therefore wrongfully depleting company
assets (the “Barnes Litigation”). Mihelick was not a party to the Barnes litigation, but
Bluso desired that Plaintiff pay half of any liability he might incur in the Barnes litigation
that came from marital assets. (Doc. 47-11 at 11:6-25; 24:16-25, 28:1-15; Doc. 47-3 at
Therefore, the divorce decree incorporated a Separation
Agreement (Doc. 47-12), containing Article 5 pertinent here, which states in relevant part:
ARTICLE 5. PAMELA BLUSO CLAIMS
The Husband and Wife agree that the Barnes Litigation may result in the
establishment of liability against one or both. The Husband and Wife agree
that said liability, if any, that arose all or in part from the acquisition of marital
assets, and which assets have been equally divided herein between the
parties, shall be deemed to be a marital liability. The Husband and Wife
further agree that they will be jointly and severally liable for all damages,
costs, attorney fees and other expenses incurred in this litigation by Michael
D. Bluso, Jr., … which is a marital liability. The Husband and Wife further
agree that the amount of damages, costs, attorney fees and other
expenses, if any, are not ascertainable at this time. The Husband and Wife
further agree that they shall mutually agree to the allocation of the payment
of any litigation costs.
The provisions set forth herein regarding the Barnes Litigation shall not be
construed as an admission of any liability by either the Wife or Husband or
waiver of defenses in connection with the Barnes Litigation, but are only
intended to resolve the issue between Husband and Wife regarding this
potential liability that arose during the marriage.
(Doc. 47-11, pp. 6-7). While Plaintiff states she had no choice but to accept Article 5, she
concedes that she ultimately had to give permission to her divorce attorney to keep Article
5 in the Separation Agreement; but she states she fought it and did not want it in the
agreement. (Doc. 47-11 at 11:16-19, 13:8-11).
The divorce was final on August 31, 2005 after the parties executed the Separation
Agreement, but the Barnes Litigation remained ongoing until settling in 2007. (Doc. 4713). Under the Barnes Litigation settlement, Bluso paid Barnes $600,000 for her excess
compensation claims. (Id. at ¶ 4; Doc. 47-3 at 38:1-22). In 2009, Plaintiff paid her exhusband $300,000, which was half of the Barnes Litigation settlement amount, under
Article 5 of their divorce agreement.2 At the conclusion of her deposition testimony and
in response to the question, “And do you feel any payment you ended up making was
voluntary or involuntary?, Plaintiff answered, “I don’t know. An obligation is an obligation.”
(Doc. 47-11 at 55:8-10).
In 2005, Bluso made a $150,000 offer to indemnify Plaintiff for the Barnes Litigation, which
Plaintiff rejected because she believed the case did not have any merit. (Doc. 47-11 at 12:7-13:5;
Doc. 47-2 at 13:20-14:16, 15:8-19).
STANDARD OF REVIEW
Under Rule 56 of the Federal Rules of Civil Procedure, “[t]he court shall grant
summary judgment if the movant shows that there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A
fact is material if it “might affect the outcome of the suit under the governing law[.]”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A material fact is genuinely
in dispute “if the [record] evidence is such that a reasonable jury could return a verdict for
the non-moving party.” Id. When deciding a motion for summary judgment, the court
views all evidence and draws all reasonable inferences in the non-moving party’s favor.
See Tana v. Dantanna’s, 611 F.3d 767, 772 (11th Cir. 2010); Shotz v. City of Plantation,
Fla., 344 F.3d 1161, 1164 (11th Cir. 2003) (citation omitted).
The moving party bears the initial burden of showing there are no genuine disputes
of material fact to be determined at trial. See Clark v. Coats & Clark, Inc., 929 F.2d 604,
608 (11th Cir. 1991). This burden is satisfied by “identifying those portions of ‘the
pleadings, depositions, answers to interrogatories, and admissions on file, together with
the affidavits, if any,’ which it believes demonstrate the absence of a genuine issue of
material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party
meets its burden, “the nonmoving party [must] go beyond the pleadings and by h[is] own
affidavits, or by depositions, answers to interrogatories, and admissions on file, designate
specific facts showing that there is a genuine issue for trial.” Celotex, 477 U.S. at 324
(internal quotations omitted). The non-moving party “may not rest upon mere allegations
or denials of his pleading, but must set forth specific facts showing that there is a genuine
issue for trial.” Anderson, 477 U.S. at 248; see also Matsushita Elec. Indus. Co., Ltd. v.
Zenith Radio Corp., 475 U.S. 574, 584-86 (1986) (stating the non-movant “must do more
than simply show that there is some metaphysical doubt as to the material facts”).
Moreover, summary judgment should be granted “against a party who fails to make
a showing sufficient to establish the existence of an element essential to that party’s case,
and on which that party will bear the burden of proof at trial.” Celotex, 477 U.S. at 322;
see also Walker v. Yamaha Motor Co., Ltd., No.6:13-cv-1546-ORL-37GJK, 2016 WL
7325518, at *11 (M.D. Fla. Feb. 16, 2016) (stating “[a]s to issues for which the non-movant
would bear the burden of proof at trial, the movant has two options: (1) the movant may
simply point out an absence of evidence to support the nonmoving party’s case; or (2) the
movant may provide affirmative evidence demonstrating that the nonmoving party will be
unable to prove its case at trial” (internal quotations and citations omitted)). This makes
sense because “there can be ‘no genuine issue as to any material fact,’ since a complete
failure of proof concerning an essential element of the non-moving party’s case
necessarily renders all other facts immaterial.” Id. at 322-23.
Plaintiff claims she is entitled to deduct the $300,000 payment under Section 1341
of the IRC, resulting in an $111,802 refund.3 26 U.S.C. § 1341(a). Defendant argues,
however, that the payment is not a taxable event that generates a deduction in the first
instance, and there is no substantial nexus between the right to the income at the time of
the receipt and the circumstances necessitating its return. Defendant further asserts that
Specifically, Plaintiff claims that she paid $111,802 in federal income tax for 1999-2004 on her
$300,000 share of $600,000 in income with her ex-husband due to their filing of joint tax returns.
See United States v. Skelly Oil Co., 394 U.S. 678, 682 (1969) (“Whenever s 1341(a)(5) applies,
taxes for the current year are to be reduced by the amount taxes were increased in the year or
years of receipt because the disputed items were included in gross income.”).
Plaintiff’s claim fails because the return of the income was voluntary and a taxpayer is not
entitled to use Section 1341 for amounts voluntarily repaid.
To qualify for favorable treatment under section 1341 (often called the “claim-ofright doctrine”), a taxpayer must establish three elements: (1) that an item was included
in the taxpayer’s gross income in a prior year because it appeared that the taxpayer had
an unrestricted right to the item in the prior year; (2) that after the close of the prior year
it is established that the taxpayer did not have an unrestricted right to such item; and (3)
that the taxpayer is entitled to a deduction (in excess of $3,000) under another section of
the Internal Revenue Code for the loss resulting from the payment of the item to another
in the current tax year. 26 U.S.C. § 1341(a); Batchelor-Robjohns v. United States, 788
F.3d 1280, 1293-94 (11th Cir. 2015). The dispute here is whether Plaintiff can establish
the final two elements. “In addition to these statutory requirements, a taxpayer must
demonstrate a ‘substantive nexus between the right to the income at the time of receipt
and the subsequent circumstances necessitating a refund.’” Batchelor-Robjohns, 788
F.3d at 1293 (quoting Steffen v. United States, 349 B.R. 734, 738 (M.D. Fla. 2005)). “The
taxpayer’s return of the income must not be the result of the taxpayer’s purely voluntary
choice; rather, it must be ‘established,’ for example, by a court, that the taxpayer did not
have an unrestricted right to the income.” Id.
The Eleventh Circuit has determined that “Section 1341 does not, by itself, create
an independent tax deduction and instead applies ‘only if another code section would
provide a deduction for the item in the current year.’”
Batchelor-Robjohns, 788 F.3d at
1294 (quoting Fla. Progress Corp. v. Comm’r, 348 F.3d 954, 957 (11th Cir. 2003)); see
also Alcoa, Inc. v. United States, 509 F.3d 173, 178 n.4 (3d Cir. 2007) (“[I]t is a
prerequisite for section 1341 treatment that the taxpayer be entitled to a deduction for all
or part of the repaid amount under some other Code section.”). In so reasoning, the
Eleventh Circuit stated:
Subsection (a) of § 1341 provides that “if” three requirements are met,
“then” the taxpayer is entitled to preferential treatment under [§ 1341]. 26
U.S.C. § 1341(a) (emphasis added). One of those requirements is that “a
deduction” be “allowable for the taxable year because it was established
after the close of such prior taxable year ... that the taxpayer did not have
an unrestricted right to such item....” 26 U.S.C. § 1341(a)(2). The provision
itself does not indicate whether a deduction should be allowable. That
answer must be found in another provision of the code.... The regulations
interpreting this provision confirm this conclusion.
Fla. Progress, 348 F.3d at 958-59 (emphasis in original). The Court agrees with the
Government it must first determine whether “another code section would provide a
deduction for the item in the current year.” Id. at 963. The taxpayer bears the burden of
proving the right to the amount of any claimed deduction. New Colonial Ice v. Helvering,
292 U.S. 435 (1934).
Here, Plaintiff contends that she should be entitled to deduct the $300,000
payment as a loss incurred in a transaction entered into for profit under Section 165(c)(2)
of the IRC, which permits individual taxpayers to deduct “losses incurred in any
transaction entered into for profit, though not connected with a trade or business.” 26
U.S.C. § 165(c)(2). The analysis of the for-profit test focuses on the subjective intent of
the taxpayer as the taxpayer’s primary motive must be one of profit. Kirchman v. C.I.R.,
862 F.2d 1486, 1492 (11th Cir. 1989) (noting that the courts evaluate whether a taxpayer
entered the transactions “primarily for profit”). In her argument, Plaintiff states that the
repayment of income from prior years is clearly a loss and she entered into the transaction
to repay past income to be released from further liability, citing Nathel v. Comm’r, 615
F.3d 83 (2d Cir. 2010), which recognized that “[i]n general, a negotiated payment to
secure a release from conditional liability under a loan guarantee is deductible as a loss
incurred in a transaction entered into for profit.” Id. at 94. (Doc. 53, Sec. E).
likens the payment to a return of income to its proper owner. The Court finds that the
payment does not qualify as a deduction under Section 165(c)(2).
Here, Plaintiff paid Bluso under a private settlement agreement and did not make
the payment because of any personal obligation resulting from the Barnes Litigation. In
addition, the loss has nothing to do with a business venture or investment and Plaintiff
fails to identify either a trade or business in which she engaged, or a for-profit transaction
through which she incurred a loss. Plaintiff was not carrying on a trade or business when
she incurred the loss.
Rather, Plaintiff is attempting to deduct a repayment of the
excessive compensation Bluso received from Gotham and returned to Barnes to settle
the Barnes Litigation.
This is not a “loss” or transaction entered into for profit
contemplated by Section 165(c)(2). Plaintiff has pointed to no evidence she entered into
the Settlement Agreement with a profit motive or economic advantage; rather it was a
bargain entered into by the parties as one part of the divorce settlement, the payment of
which was characterized as fulfilling an obligation under the divorce decree based upon
Plaintiff’s own testimony.
Furthermore, Plaintiff has otherwise pointed to no other
provision of the IRC under which the payment would be deductible.
Therefore, the Court finds there is no genuine issue of material fact as to whether
the loss qualifies as a deduction under the IRC in the first instance, Batchelor-Robjohns,
788 F.3d at 1294; accordingly, the Court does not reach the issue of whether Plaintiff had
an unrestricted right to the item of income under Section 1341(a).
Accordingly, it is now
Defendant’s Motion for Summary Judgment (Doc. 47) is GRANTED. The Clerk is
DIRECTED to enter judgment terminate any pending motions and deadlines, and close
DONE and ORDERED in Fort Myers, Florida this 10th day of October, 2017.
Copies: All Parties of Record
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