Estate of Robert S. Bowen v. United States of America
Filing
20
MEMORANDUM AND ORDER granting 8 Motion of United States for Summary Judgment; denying 15 Motion of plaintiff for Summary Judgment. Signed by Judge Marvin J. Garbis on 7/23/12. (jnls, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
ESTATE OF ROBERT S. BOWEN
Plaintiff
*
vs.
*
UNITED STATES OF AMERICA
Defendant
*
*
*
*
CIVIL ACTION NO. MJG-11-2231
*
*
*
*
*
*
*
*
MEMORANDUM AND ORDER
The Court has before it the United States' Motion for
Summary Judgment [Document 8], Plaintiff's Motion for Summary
Judgment [Document 15] and the materials submitted relating
thereto.
The Court has held a hearing and had the benefit of
the arguments of counsel.
I.
BACKGROUND
In 2006, Robert S. Bowen ("Bowen") was a resident of
Annapolis, Maryland who, after his retirement, engaged in
various business enterprises.
Bowen died in November, 2009.
The instant case relates to a yacht ("the Boat") that Bowen
bought in 2006.
Bowen's Estate ("Plaintiff") claims that Bowen
paid almost $750,000 for the Boat and expended over $1,000,000
to repair defects.
in 2010.
The Boat was sold by the Estate for $350,000
Plaintiff seeks a refund of federal income taxes paid by
Bowen for the year 2006, contending that he did not claim
certain deductions to which he was entitled in regard to the
Boat.
The Government contends that Bowen did not have a right
to any such deductions on the 2006 federal income tax return.
II.
SUMMARY JUDGMENT STANDARD
A motion for summary judgment shall be granted if the
pleadings and supporting documents "show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law."
Fed. R. Civ. P.
56(c)(2).
The well-established principles pertinent to such motions
can be distilled to a simple statement:
The Court may look at
the evidence presented in regard to the motion for summary
judgment through the non-movant's rose colored glasses, but must
view it realistically.
After so doing, the essential question
is whether a reasonable fact finder could return a verdict for
the non-movant or whether the movant would, at trial, be
entitled to judgment as a matter of law.
See, e.g., Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986); Adickes v. S.H. Kress & Co.,
2
398 U.S. 144, 158-59 (1970); Shealy v. Winston, 929 F.2d 1009,
1012 (4th Cir. 1991).
III. DISCUSSION
As discussed herein, Plaintiff seeks a recovery based upon
a variety of theories.
The parties certainly disagree as to
whether Mr. Bowen was engaged in a business or hobby vis-à-vis
the boat and other intent issues.
However, it is not necessary
to determine whether Plaintiff has presented sufficient evidence
to avoid summary judgment in regard to such matters.
Rather, as
discussed herein, even accepting Plaintiff's position on all
such issues, the Government is entitled to summary judgment.
A.
The Boat Transactions
In 2006, Bowen ordered1 a 65-foot yacht to be built by a
Chinese boat-building company.
The Boat, for which Bowen paid
some $750,000, was manufactured in 2006 and shipped by freighter
from China in November 2006.
The Boat arrived in North Carolina
on or about December 28, 2006.
Carolina in early January 2007.
The Boat was inspected in North
Substantial problems were
found, but Bowen was able to sail the Boat to Annapolis.
1
Through a holding company.
3
Bowen made claims against the Chinese company for
manufacturing defects and against an insurer for damage
occurring during shipment. Bowen eventually settled his claims
against the insurer for $120,000 in 2009.
Bowen was not able to
obtain any recovery from the manufacturer.
From 2007 through 2009, Bowen paid substantial amounts for
repairs to the Boat.
In June 2010, Bowen's Estate sold the Boat
for $350,000.
B.
The Nature of This Tax Refund Suit
Plaintiff has properly filed this tax refund suit.
Plaintiff, by Bowen while alive, met the jurisdictional
prerequisite of full payment2 of the amount shown due on his 2006
federal income tax return.
Plaintiff timely filed a claim for
refund on Form 1040-X (Amended Return) stating the grounds upon
which the refund is claimed on or about October 13, 2010.
The
Estate timely filed the instant lawsuit on August 11, 2011.
A timely claim for refund is a jurisdictional prerequisite
to a tax refund suit.
§ 1314(b).3
Consequently, in a tax refund
suit, the plaintiff's grounds for recovery are limited to those
grounds set forth in the claim for refund on which the suit is
2
Flora v. United States, 362 U.S. 145 (1960).
All § references herein are to the Internal Revenue Code, Title
26 of the United States Code, unless otherwise stated.
3
4
based.
United States v. Felt & Tarrant Mfg. Co., 283 U.S. 269,
272 (1931).
The statement of grounds in a claim for refund must
state "in detail each ground upon which a credit or refund is
claimed and facts sufficient to apprise the Commissioner of the
exact basis thereof." 26 C.F.R. § 301.6402-2(b). Thus, the claim
must contain "sufficient information to allow the Commissioner
to address the merits of the dispute." Beckwith Realty, Inc. v.
United States, 896 F.2d 860, 863 (4th Cir. 1990).
The Service
should not need to "hazard a guess" as to the amount or reason
that the taxpayer was seeking a refund. Id. at 862.
The claim for refund on which Plaintiff bases the instant
case is little more than a "hodge-podge" with a listing of
Internal Revenue Code4 Sections that, for the most part, have no
conceivable materiality.
Moreover, Plaintiff adds to each
identification of specific Code sections, the ineffectual mantra
"or any other applicable provision of the IRC." See IA 80 Group,
Inc. v. United States, 347 F.3d 1067, 1075 n.9 (8th Cir.
2003)("A general objection and demand for refund would in fact
encompass all conceivable grounds for a refund, but the IRS is
not required to ferret out on its own the specific claims
advanced by the taxpayer.")
4
References herein to "Code" are to the Internal Revenue Code,
Title 26, United States Code.
5
The Court will address each ground for recovery stated in
Plaintiff's claim for refund.
In so doing, the Court will
determine only whether there is a basis for recovery of an
overpayment of Bowen's 2006 federal income tax liability by
virtue of a ground stated in the claim for refund at issue.
The
Court is not addressing whether there could be some basis for
recovery of an overpayment of Bowen's federal income tax
liability for some other year or on a ground that might have
been set forth in some other claim for refund.
C.
Asserted Grounds For Recovery
1.
"Damaged Inventory"
The claim for refund states:
The taxpayer is deceased; and, additional
information has come to light to amend the
2006 tax return as originally filed to
include a deduction for a business loss.
So this return amends the 2006 original
return by including a deduction [for] 2006
for a business loss for damaged inventory.
The deduction was erroneously omitted from
and not previously taken on the 2006 Income
Tax Return as originally filed.
As discussed at the hearing on the instant motions, the
claim for "damaged inventory" is a claim that the Boat
constituted inventory of Bowen's boat business that became
worthless at the end of the year 2006.
6
Hence, it is claimed,
Bowen would have been entitled to a 2006 deduction by virtue of
marking down its inventory from the cost of the Boat to its end
of year fair market value.
Thus, Plaintiff claims that Bowen
was entitled to a cost of goods sold deduction on his Schedule C
because his end of year inventory was worthless.
The Court will assume, but by no means finds, that
Plaintiff has submitted evidence sufficient to prove that Bowen
was engaged in a business cognizable for income tax purposes and
that the Boat could properly be considered to be inventory of
that business.
Nevertheless, the Government is entitled to
summary judgment with regard to the "damaged inventory" loss
claim.
First, and conclusively, Plaintiff manifestly has not
presented evidence sufficient to prove that the value of the
Boat was zero at the end of 2006.
Plaintiff has presented no
appraisal or other evidence sufficient to establish that the
Boat had no value,5 or what was the fair market value of the Boat
as of the end of 2006.
Furthermore, the Amended Return that constitutes the claim
for refund on which the suit is based includes an election that
does not permit an inventory mark down deduction.
5
The alleged
The Boat, with all of its problems, was sufficiently functional
to sail, on its own, from North Carolina to Maryland in early
2007.
7
boat business is reported as "Ferro Yachts" on Schedule C.
Any
inventory markdown deduction must be reported in connection with
Part III, Cost of Goods Sold.
This section calls for the
reporting of, among other things, "inventory at beginning of the
year" (line 35), purchases (line 36) and "inventory at end of
year" (line 41).
Plaintiff left blank the line for opening inventory which,
as Plaintiff argues is correct in that there was no opening
inventory.
Plaintiff left blank the line for closing inventory
which, as Plaintiff argues, is correct if the closing inventory
had no value.
Plaintiff also left blank the line for purchases
which is not correct.
However, since there is an entry in the
Other Expenses category for "Inventory Damage Loss" of
$1,030,917 (an amount that includes, but is not limited to, what
was actually paid for the Boat), the Court will assume that this
could constitute substantial compliance with the need to report
purchases.
However, Plaintiff did not leave blank the line requiring
the statement of "Method(s) used to value closing inventory"
(line 33).
On this line, Plaintiff elected "Cost" and not
"Lower of cost or market."
to be reported at cost.
Therefore, the closing inventory had
Accordingly, even if Plaintiff had
8
established that the Boat had a year-end value lower than its
cost, there would still be no "damaged inventory" deduction.
2.
"Stock in Trade"
The claim for refund states:
Alternatively, if the expenditures may not
be deducted in 2006 as a business loss for
damaged inventory, then
the expenditures may be capitalized as:
stock in trade of the taxpayer or other
property of a kind which would properly be
included in the inventory of the taxpayer if
on hand at the close of the taxable year, or
property held by the taxpayer primarily for
sale to customers in the ordinary course of
his trade or business and written down to
lower of cost or market at year end . . .
To the extent that this can be comprehended, it appears to
be duplicative of the "damaged inventory" ground.
Even if there could be some valid legal theory found in the
foregoing verbiage, however, the theory would be based upon the
contention that the Boat had a lower value than its cost as of
the end of 2006.
Any such claim would fail due to the absence
of proof of the end of year fair market value and also the
election to value inventory at cost rather than the lower of
cost or market.
9
3.
"Capitalization"
The claim for refund states:
Alternatively, if the expenditures may not
be deducted in 2006 as a business loss for
damaged inventory, then
the expenditures may be capitalized as:
. . . .
property, used in his trade or business, of
a character which is subject to the
allowance for depreciation provided in
Internal Revenue Code Section(s) (hereafter
"IRC") 167 and or IRC 1245 or real property
used in his trade or business under IRC
1250; and or depreciated under IRC 167, 168,
179 and or any other applicable provision of
the Internal Revenue code as amended, and
or amortized under IRC 195 and or any other
applicable provision of the Internal Revenue
code as amended . . .
a.
§ 167 (Depreciation)
Section 167(a) of the Code provides:
(a)
There shall be allowed as a depreciation
deduction a reasonable allowance for the
exhaustion, wear and tear (including a
reasonable allowance for obsolescence) (1)
of property used in the trade or
business, or
(2)
of property held for the production of
income.
The Court will assume that Plaintiff can prove that the
Boat was, as of the end of 2006, property either used in Bowen's
trade or business or held for the production of income.
10
Thus,
it is assumed that the Boat could be depreciable property.
However, the right to a depreciation deduction does not commence
until the depreciable property is placed in service. The term
"placed in service," means the time that property is first
placed by the taxpayer "in a condition or state of readiness and
availability for a specifically assigned function, whether in a
trade or business, in the production of income, in a tax-exempt
activity, or in a personal activity." 26 C.F.R. § 1.167(a)11(e)(1)(i); see also 26 C.F.R. § 1.179-4(e).
Plaintiff has not produced evidence adequate to prove that
the Boat was put in service before the end of 2006.
Indeed, it
is undisputed that the Boat was unloaded in North Carolina from
the freighter bringing it from China on or about December 28,
2006. The Boat was not even inspected in North Carolina until
early January 2007 and was then sailed to Maryland where various
remedial measures, continuing through 2009, were necessary.
Furthermore, even if there were, somehow, found to be proof
that Bowen was entitled to some depreciation deduction for 2006,
Plaintiff has not presented evidence adequate to prove the
amount of depreciation that would be allowable for the year.6
6
Indeed, even on the most extreme assumption - that the Boat was
"in service" the minute it was unloaded from the freighter there would be some 3 days of depreciation in 2006.
11
b.
§ 168 (Accelerated Cost Recovery)
Code Section 168 relates to a taxpayer's ability to
accelerate the rate of depreciation of certain depreciable
property.
Plaintiff does not explain how this provision enabled
Bowen to have any depreciation deduction at all for the Boat in
2006.
c.
§ 1245 (Disposition Gain)
Code Section 1245 relates to the treatment of gain from
dispositions of certain depreciable property.
disposition of the Boat in 2006.
There was no
Plaintiff does not explain how
there can be a basis for recovery under this provision.
d.
§ 1250 (Disposition of Realty)
Code Section 1250 relates to gain from dispositions of
certain depreciable realty.
Plaintiff does not explain how the
Boat could be considered to be "realty" in 2006 or in any year
and/or even if it were realty, how there could be some basis for
recovery under this provision.
e.
§ 178 (Disposition of Depreciable Property)
Code Section 178 relates to gain from dispositions of
certain depreciable property.
There was no disposition of the
12
Boat in 2006. Plaintiff does not explain how there can be any
basis for recovery under this provision.
f.
§ 179 (Expensing Depreciable Assets)
Code Section 179 relates to an election to expense the
cost of certain depreciable business assets.
As discussed
above, the Boat was not, in 2006, a depreciable business asset.
Plaintiff does not explain how there is some basis for recovery
under this provision.
g.
§ 195 (Start-Up Expenditures)
Code Section 195 relates to start-up expenditures and, in
essence, allows a taxpayer to defer certain deductions.
Plaintiff does not explain how this provision has any pertinence
to the instant case or how it could benefit from deferring from
2006 to a later year any deductions to which Bowen may have been
entitled.
4.
§§ 172, 174, and 163
The claim for refund states, as alternative grounds for
recovery:
the expenditures may be deducted under 172,
174, 163 . . .
13
a.
§ 172 (Net Operating Loss)
Section 172(a) provides, in pertinent part:
There shall be allowed as a deduction for
the taxable year an amount equal to the
aggregate of (1) the net operating loss
carryovers to such year, plus (2) the net
operating loss carrybacks to such year.
Generally, a net operating loss can be carried forward from
a prior year and back from a later year.
The carry forward can
be to each of the 20 years following the loss year and the
carryback can be "to each of the 2 [or 37] taxable years
preceding the taxable year of such loss." § 172(b)(1)(A).
The claim for refund does not specify the taxable year or
years from which a net operating loss would be carried forward
or back to 2006.
Literally, then, the claim would include a
carry forward from any of the years 20 years before and 2 or 3
years after 2006.
Even if construed as limited to carrybacks,
the claim for refund does not specify which of the returns for
the years 2007, 2008, and/or 2009 must be examined to determine
the amount of any "carryable" net operating loss.
This alone is sufficient reason to grant summary judgment
to the Government in regard to whatever is meant by Plaintiff's
reference to § 172 in the claim for refund.
7
In certain circumstances, 3 taxable years may be allowed. § 172
(b)(1)(F).
14
The Court notes the Government's apparently meritorious
contention that a refund claim for a net operating loss
deduction must be made on an amended tax return for the net
operating loss year and not for the year to which the loss is to
be carried.
Plaintiff did not directly address this contention
but filed, in March 2012, a Form 1040-X for 2009 claiming a net
operating loss carryback from 2009 to 2006.
The Government
contends that this 2009 refund claim was untimely.
It suffices,
for present purposes, to note that the 2009 1040-X refund claim
is not part of the instant case.
If and when Plaintiff files a
tax refund suit based on that claim, its validity shall be
resolved in due course.
Finally, even if the claim for refund at issue should,
somehow, be considered adequate to specify a claim for a net
operating loss carryback to 2006 from some other year or years,
Plaintiff has not presented evidence adequate to establish the
amount of any net operating loss from any year that could be
carried back to 2006.
b.
§ 174 (Research and Experimental Deductions)
Code Section 174 relates to research and experimental
expenditures and, in essence, allows a deduction for such
expenditures that might otherwise be capitalized.
15
However, §
174(e) provides: "This section shall apply to a research or
experimental expenditure only to the extent that the amount
thereof is reasonable under the circumstances."
Plaintiff has not presented evidence adequate to establish
that the amount paid in 2006 for the acquisition of the Boat was
a reasonable expenditure for research and experimental purposes.
c.
§ 163 (Interest)
Section 163 provides for a deduction for interest paid on
indebtedness.
Plaintiff does not, however, contend that Bowen
paid any deductible interest in 2006 and does not explain how §
163 is pertinent to the instant case.
5.
"Capitalization"
The refund claim states, as another alternative:
the expenditures may be capitalized as a
capital asset under IRC 1221 deducted as
expenses related to the production of income
under IRC 212 . . .
a.
§ 1221 Capital Asset
Section 1221 states:
(a)
In general
For purposes of this subtitle, the
term "capital asset" means property
held by the taxpayer (whether or not
16
connected with his trade or
business), but does not include –
(1)
stock in trade of the taxpayer
or other property of a kind
which would properly be included
in the inventory of the taxpayer
if on hand at the close of the
taxable year, or property held
by the taxpayer primarily for
sale to customers in the
ordinary course of his trade or
business;
(2)
property, used in his trade or
business, of a character which
is subject to the allowance for
depreciation provided in section
167, or real property used in
his trade or business;
Plaintiff does not explain how this section, applicable if
the Boat were not treated as inventory or property used in
Bowen's trade or business, could provide a basis for some
deduction for the year 2006.
b.
§ 212 (General Deduction Provision)
Section 212 states:
In the case of an individual, there shall be
allowed as a deduction all the ordinary and
necessary expenses paid or incurred during
the taxable year –
(1)
for the production or collection of
income;
(2)
for the management, conservation, or
maintenance of property held for the
production of income; or
17
(3)
in connection with the determination,
collection, or refund of any tax.
The Section does not, itself, define, increase, or decrease
deductions allowable by other Code Sections.
Plaintiff does not
explain how this provision would provide a ground for a tax
refund.
6.
"Decrease in Value"
The claim for refund states as another alternative:
the decrease in value of the expenditures
may be allowed as losses under IRC 165, 166
. . .
a.
§ 165 (Casualty Loss)
Section 165 states:
There shall be allowed as a deduction any
loss sustained during the taxable year and
not compensated for by insurance or
otherwise.
As relevant hereto, § 165(h) provides a deduction for a
loss from a "casualty."
To qualify as a "casualty," a loss must
be "due to sudden, unexpected, or unusual events as opposed to a
gradually developed result, such as one that occurs through
normal operation and deterioration." Smith v. Comm'r, 608 F.2d
321, 322 (8th Cir. 1979).
18
Plaintiff contends that Bowen sustained a casualty loss
because the Boat was damaged by waves while in transit from
China to North Carolina.
It is true that damages caused by waves as alleged by
Plaintiff would constitute damage caused by a casualty for § 165
purposes.
However, Plaintiff has not presented admissible
evidence adequate to prove that the Boat was damaged by waves
while en route to the United States.
The only "evidence" that
there was casualty damage consists of out of court (hearsay)
statements alleged made by boat crew members.
Moreover, even if Plaintiff were to prove that there had
been a casualty, Plaintiff has not presented evidence adequate
to establish the amount of damage caused by the casualty as
distinct from the damage caused by defective manufacturing.
In addition, there is a timing issue.
A casualty loss is
deductible only after it can be ascertained with reasonable
certainty whether or not reimbursement – such as from an insurer
- will be received.
26 C.F.R. § 1.165-1(d).
It is undisputed
that, until 2009, Bowen was pursuing a claim for the damage
occurring during shipment from an insurer.
Hence, there can be
no 2006 casualty loss deduction for such damage.
See D.L. White
Constr., Inc. v. Comm'r, 2010 T.C.M. 141, 2010 WL 2595080, *4
19
(T.C. 2010)(disallowing the loss to be deducted in 2002 when
insurance proceeds were received in 2004).
Finally, a casualty loss is deductible only to the extent
the loss is "not compensated for by insurance or otherwise."
There is no doubt that Bowen recovered $120,000 from an insurer
in settlement of his claim for damage occurring while the Boat
was en route, i.e., during the time when any casualty would have
occurred. Plaintiff has not presented evidence adequate to prove
that any damage from a casualty exceeded $120,000.
b.
§ 166 (Bad Debt)
Section 166 provides for a deduction for a debt that
becomes worthless during the taxable year.
Plaintiff does not
explain how this provision can have any relevance to the instant
case.
20
IV.
CONCLUSION
For the foregoing reasons:
1.
The United States' Motion for Summary Judgment
[Document 8] is GRANTED.
2.
Plaintiff's Motion for Summary Judgment [Document
15] is DENIED.
3.
Judgment shall be entered by separate Order.
SO ORDERED, on Monday, July 23, 2012.
/s/__________
Marvin J. Garbis
United States District Judge
21
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?