Robb Evans & Associates LLC. v. The United States of America

Filing 43

Judge Michael A. Ponsor: MEMORANDUM AND ORDER entered. As follows: For the reasons stated, the Report and Recommendation of the Magistrate Judge (Dkt. No. 35 ), upon de novo review, is hereby ADOPTED in its entirety. Defendants motion to dismiss (Dk t. No. 12 ) is hereby ALLOWED in part, as to the question of the scope of potential damages, and is otherwise DENIED. The case is referred to Magistrate Judge Neiman for a pretrial scheduling conference. It is so ordered. See the attached memo and order for complete details. (Lindsay, Maurice)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

ROB EVANS & ASSOCIATES, LLC,
RECEIVER,
Plaintiff,
v.
THE UNITED STATES OF AMERICA,
Defendant.

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C.A. No. 12-cv-30130-MAP

MEMORANDUM AND ORDER RE:
REPORT AND RECOMMENDATION WITH REGARD TO
DEFENDANT’S MOTION TO DISMISS
AND/OR FOR JUDGMENT ON THE PLEADINGS
(Dkt. Nos. 12 & 35)
March 31, 2014
PONSOR, U.S.D.J.
I.

INTRODUCTION

On January 7, 2008, this court granted summary judgment
for the plaintiffs in a class action brought by Andrew and
Kelly Zimmerman against John and Richard Puccio and five
corporate entities owned and controlled by the Puccios.
Zimmerman v. Cambridge Credit Counseling Corp., 529 F. Supp.
2d 254 (D. Mass. 2008), aff’d, 613 F.3d 60 (1st Cir. 2010).
The basis for the judgment was the court’s finding that the
Puccios had perpetrated a scheme to defraud their customers

while purporting to offer them advice and guidance with
their credit problems, in violation of the Credit Repair
Organization Act (“CROA”), 15 U.S.C.§§ 1679 et seq., and the
Massachusetts Consumer Protection Act, Mass. Gen. Laws ch.
93A.

Id.
After entering judgment against the corporate

defendants in the amount of $259,085,983, as well as against
the individual defendants in the amount of $256,527,000 plus
costs and interest, the court appointed a receiver, Robb
Evans & Associates, LLC (hereinafter, the “Receiver”).
(C.A. No. 03-30261-MAP, Dkt. Nos. 375 & 420.)

The court

imposed a constructive trust over the fees paid by the
defrauded class members to the Puccios and the related
corporate defendants.

It granted the Receiver the power to

manage, control, and liquidate property held by these
defendants and to bring legal actions in an effort to locate
funds to pay off the judgment and compensate the plaintiff
class.

In connection with this, the court authorized the

Receiver to open a bank account, called a Qualified
Settlement Fund (“QSF”), to hold the monetary assets of the
receivership as they were acquired.
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As of July 19, 2012,

the Receiver had collected $2,437,851.71 from the individual
and corporate defendants in partial satisfaction of the
court’s judgment.
On April 29, 2011, the Receiver filed with the IRS
income tax returns for the settlement funds, Form 1120-SF,
covering a short period of 2008 and for all of 2009.

The

2009 return, on behalf of the receivership estate, sought a
refund of the tax payments made by the Puccios and their
corporations that derived from the funds fraudulently
obtained from the Zimmerman plaintiff class members.

In an

attachment to the 2009 form, the Receiver asserted that he
was entitled to a “claim of right” refund1 pursuant to 26
U.S.C. § 1341,2 supposedly because the Puccios and the

1

The “claim of right” doctrine defines a taxpayer’s
rights with respect to money declared as income.
“If a
taxpayer receives earnings under a claim of right and without
restriction as to its disposition, he has received income”
that must be reported on his tax return in the year it was
received. N. Am. Oil Consol. v. Burnet, 286 U.S. 417, 424
(1932). Where a taxpayer establishes that he or she “did not
have an unrestricted right to” income that was erroneously
taxed in a previous year -- for example where he has paid the
money back -- the taxpayer may claim a deduction. 26 U.S.C.
§ 1341(a)(2).
2

Congress passed § 1341 to remedy the instances where
taxpayers, who paid taxes on income in one year that in a
later year they could take as a deduction, could not recover
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related entities paid taxes on income that, as a result of
the court’s establishment of the constructive trust, they
were obligated to repay.

This obligation to repay, the

Receiver claimed, meant that this income could no longer be
attributed to the Puccios for tax purposes.

On June 27,

2011, the IRS denied the requested refund.
Of course, the notion that the Puccios are obligated to
give back the money they received through their fraud is
somewhat hypothetical.

Most of the money they and their

corporations took in, and which they paid taxes on, appears
to be gone.

The Receiver has managed to recover only around

one percent of the money awarded by the court in the
Zimmerman judgment.

The great bulk of the fraudulently

obtained monies might most generously be described as a kind
of phantom fund now resting, invisibly, in the Receiver’s
hands through the mechanism of the constructive trust, in
the highly unlikely event that the Puccios will ever be able
to make good on their “obligation” to pay it back.

the full amount of taxes previously paid because the tax rate
changed. “In sum, § 1341 is designed to put the taxpayer in
essentially the same position he would have been in had he
never received the returned income.” Dominion Res., Inc. v.
United States, 219 F.3d 359, 363 (4th Cir. 2000).
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On July 19, 2012, Plaintiff, in his role as Receiver,
brought the current action against Defendant, the United
States of America, seeking to recover on behalf of the
plaintiff class in Zimmerman over $9 million in taxes paid
by the Puccios and their corporations, based upon five years
of income they received through their fraudulent schemes.
In response to the claim, Defendant United States of
America filed a motion to dismiss and/or for judgment on the
pleadings (Dkt. 12), which the court referred to Magistrate
Judge Kenneth P. Neiman for report and recommendation
(“R&R”).

On November 20, 2013, Judge Neiman issued his

memorandum, recommending that Defendant’s motion be denied
to the extent that it sought outright dismissal of the
complaint, but allowed to the extent that it sought to limit
drastically the amount of potential damages available to
Plaintiff.

(R&R, Dkt. No. 35.)

Both parties filed timely objections to the R&R.
Nos. 37 & 39.)

(Dkt.

Upon de novo review, 28 U.S.C. § 636(b), the

court will adopt the Magistrate Judge’s recommendation.

The

scrupulous job done by Judge Neiman in his R&R obviates the
need for an extended recapitulation of his reasoning.
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II.

DISCUSSION

Before turning to the substantive objections, one
preliminary matter needs to be addressed.

In support of his

objections to the R&R, Plaintiff has offered at least one
substantive argument and a raft of additional documentary
material not in the record at the time Judge Neiman was
considering the parties’ motions.
points out, this is not proper.

As Defendant’s reply
The hearing before the

Magistrate Judge cannot be treated as a dress rehearsal,
with difficulties in the performance to be tweaked in
preparation for opening night before the district judge.
See, e.g., Patterson-Leitch Co. v. Mass. Mun. Wholesale
Elec. Co., 840 F.2d 985, 990-91 (1st Cir. 1988).

The

argument that the United States has “no equitable title” to
taxes paid by the Puccios on their ill-gotten gains, (Pl.’s
Objections 2, Dkt. 37), was not raised in recognizable form
before Judge Neiman and need not be considered here.3

3

The argument, in any event, is without merit. It is
well established that even embezzled funds are taxable. James
v. United States, 361 U.S. 213, 221 (1961). Although a court
may be called upon to adjudicate the priority of competing
claims to taxable income or property, the government possesses
an equitable interest in taxes assessed and paid even on money
obtained through fraud.
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Turning first to the two arguments offered by Defendant
in favor of outright dismissal of the complaint -– sovereign
immunity and collateral estoppel -- this court agrees with
Judge Neiman that, even acknowledging some ambiguity in the
law, the stronger authority favors Plaintiff.
On the issue of sovereign immunity, Defendant argues
that the provisions of the Internal Revenue Code bar
Plaintiff, as a third party, from seeking a refund of taxes
paid by a taxpayer, here the Puccios.

Simply put, Defendant

says that Plaintiff lacked standing under the Internal
Revenue Code to bring the suit to recover taxes paid by
someone else.

Accordingly, since Congress did not waive

sovereign immunity except as to claims brought by original
taxpayers themselves, Plaintiff’s suit must be dismissed.
Judge Neiman found otherwise, and this court agrees.2

2

Judge Neiman also properly rejected Defendant’s
argument that Plaintiff lacked power to seek recovery of taxes
paid by the Puccios because there was no specific statute
authorizing its claim, as there is in the bankruptcy context,
with successor corporations, or in the case of deceased
taxpayers. This argument has some force, but it is contrary
to the Supreme Court’s dicta in Williams that a “taxpayer's
fiduciary may litigate the taxpayer's liability, even though
the fiduciary is not herself liable.” U.S. v Williams, 514
U.S. 527, 539 (1995); see also 26 U.S.C. § 6903(a).
Additionally, Judge Neiman correctly rejected Defendant’s
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First, Congress waived sovereign immunity through 28 U.S.C.
§ 1346(a)(1), which provides original jurisdiction in
district courts for “[a]ny civil action against the United
States for the recovery of any internal-revenue tax alleged
to have been erroneously or illegally assessed or collected
. . . or in any manner wrongfully collected under the
internal-revenue laws.”

Brodey v. United States, 788 F.

Supp. 44, 48 (D. Mass. 1991) (Skinner, J.) (stating that
there are no “convincing reasons why [the government] should
not refund amounts erroneously paid to the people who paid
them”).

Equally importantly, as a court-appointed and

argument that a technical error in Plaintiff’s paperwork
prevented it from establishing standing. In filing the refund
claim, Plaintiff did so in the name of the QSF, not in the
name of the Puccios. Though Defendant raises this error now,
it did not use this error as a basis to deny Plaintiff’s
claim. Judge Neiman found Defendant treated the claim as one
made on behalf of the Puccios and not the QSF. Judge Neiman
also concluded that Defendant understood the basis for
Plaintiff’s claim for refund. Further, because any attempt to
cure the deficiency by Plaintiff would be considered untimely
by Defendant, Judge Neiman found the administrative error both
immaterial and waived. Angelus Milling Co. v. C.I.R., 325
U.S. 293, 297-98 (1945) (stating that if the evidence is
“clear that the Commissioner understood the specific claim
that was made even though there was a departure from form in
its submission,” the Court will not allow the Commissioner of
Internal Revenue to invoke a technical objection where he
already considered the merits and acted on them).
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congressionally authorized equity receiver, Plaintiff “has
stepped into the shoes of the underlying defendants in
asserting their legal claims.”

(R&R 11, Dkt. No. 35.)

See

U.S. v. Williams, 514 U.S. 527, 529 (1995) (holding that
respondent, who had paid a tax under protest to remove a
lien on her property, had standing under 28 U.S.C. §
1346(a)(1) to sue for a refund).

Recognizing, as the court

has noted, that the law is not perfectly clear on this
point, the stronger authority suggests that Plaintiff, in
its role as fiduciary, is not absolutely barred by the
doctrine of sovereign immunity from prosecuting this lawsuit
on behalf of the Zimmerman class.
In its argument based on collateral estoppel, Defendant
contends that Plaintiff is prohibited from claiming relief
under § 1341 because the statute does not permit refunds
where the income is obtained by fraud.

As Plaintiff has

“stepped into the shoes” of the Puccios, the argument runs,
it could only claim those rights that the Puccios themselves
possessed.

Since the Puccios were found by this court to

have committed fraud, Plaintiff, which shares it legal
identity with the defrauding Puccios, is precluded from
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recovering a refund.
Like Judge Neiman, this court is persuaded by the logic
of Cooper v. United States, 362 F. Supp. 2d 649 (W.D.N.C.
2005), that the fraudulent conduct of the Puccios should not
be imputed to Plaintiff, who is tasked with recovering funds
for the victims of the Puccio’s fraud.3

In Cooper, the

court refused to impute to the bankruptcy trustee the
fraudulent acts committed by the debtor.

Id. at 656.

To do

so, the court held, would be “to deprive the very victims of
the fraud from recovering what is essentially and rightfully
theirs” and would not further the purpose of the fraud
exception to recovery under § 1341.

Id.

Courts have

exhibited a similar disinclination to impute fraud to a

3

Plaintiff made three other arguments in opposition to
Defendant’s assertion of collateral estoppel, all of which
lack merit. First, Plaintiff argued that the Puccios did not
believe at the time they reported the income that they had
received it through fraud. However, the record of the
Zimmerman litigation clearly showed otherwise, and this court
specifically found to the contrary. Second, Plaintiff argued
that the elements of collateral estoppel were not satisfied,
since the issues were not identical. With regard to the issue
of the Puccio’s fraudulent conduct, however, the issues here
and in the Zimmerman case are identical. Third, Plaintiff
argued that the equitable defense of collateral estoppel
simply could not be asserted against an equity receiver. No
authority was cited in support of this assertion, and the
court has found none.
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receiver in the corporate context.

See Jones v. Wells Fargo

Bank, N.A., 666 F.3d 955, 966 (5th Cir. 2012) (“Although a
receiver generally “has no greater powers than the
corporation had as of the date of the receivership,” it is
well established that “when the receiver acts to protect
innocent creditors . . . he can maintain and defend actions
done in fraud of creditors even though the corporation would
not be permitted to do so”).
Although cases in the bankruptcy and corporate context
do not provide a perfect fit with the case at hand, their
logic is compelling.

Where a receiver is attempting to

recover funds for the victims of fraud, he should not be
hamstrung with the imputation that he is himself, in effect,
guilty of the fraud and thus barred from advancing the
interests of the victims.

For this reason, the doctrine of

collateral estoppel does not appear to justify threshold
dismissal of this lawsuit.
It must be conceded that Defendant’s protests about the
unfairness and illogic of the court’s position have some
traction.

Plaintiff is being permitted to step into the

Puccios’ shoes for the purpose of asserting a claim for a
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tax refund, but then step out of the shoes to avoid losing
its claim based on the Puccio’s fraud.

The response to this

criticism is that the nature of Plaintiff’s role as a
receiver makes this paradox sensible.

It can step into the

malefactor’s boots, but it can also, as it were, knock the
mud off them before putting them on.

Absent this, Plaintiff

would have no power to do its job and protect the victims’
rights.
Although the stronger authority persuades the court
that Plaintiff is entitled to prevail in the battle over
whether this lawsuit should be dismissed outright,
Defendant’s third argument strips Plaintiff of the lion’s
share of the spoils of its victory.

To the extent that

Plaintiff is entitled to anything, the refund must be based
upon the amount of money actually transferred into the QSF
in 2009, and not the full amount of the taxes paid by the
Puccios and their related corporations between 2001 and
2005.

In an effort to prevent its victory from turning

Pyrrhic, Plaintiff offers two arguments.

Neither is

persuasive.
First, Plaintiff’s argument to the contrary
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notwithstanding, the issue of the scope of potential damages
is properly before the court at this time.

This is

manifestly a discrete legal question that is ripe for
resolution.

See Barr Inc. v. Town of Falmouth, 488 F. Supp.

2d 5, 8-9 (D. Mass. 2007) (determining at the motion to
dismiss stage that, under clear state law, the plaintiff’s
damages were limited).
Moreover, Judge Neiman’s conclusion on this point was
entirely correct.

Plaintiff may only recover a refund of

taxes based on the funds actually “given back” -- i.e. those
actually restored to the QSF -- and not the full amount paid
in income taxes based on the total quantum of funds obtained
by fraud by Puccios and their corporations, the bulk of
which has never been recovered.

The fact that the Puccios

and their corporations are now “obligated” to return the
funds does not help Plaintiff.
The conclusion is supported by the plain language of §
1341.

The very title of the statute describes a

“Computation of tax where taxpayer restores substantial
amount held under claim of right.”
(emphasis added).

26 U.S.C. § 1341

The statute’s text makes clear that the
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deduction sought must be “allowable.”

Id.

Other provisions

of the Internal Revenue Code make clear the conditions under
which a refund sought by Plaintiff would be allowable.
Under § 461, a deduction in a particular tax year may
be claimed only where “economic performance” has occurred.
26 U.S.C. § 461(h).

The only analogy to “economic

performance” available to Plaintiff here is the repayment of
recovered funds into the QSF.

As the R&R points out,

numerous courts have held that the obligation to repay is
not enough; there must be repayment.

See Chernin v. United

States, 149 F.3d 805, 816 (8th Cir. 1998); (R&R 27-28
(citing other cases), Dkt. No. 35).

In this context,

Plaintiff is limited to claiming a deduction only for those
amounts paid into the QSF for the particular year it is
claiming the refund.

No authority suggests that the ghostly

movement of hypothetical funds -- funds never actually
recovered -- into the constructive trust would constitute
the sort of “performance” that would justify a refund of
taxes calculated upon income received and apparently spent
by the Puccios years ago.
Indeed, the collection of a refund based upon funds
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paid into the QSF is a best case scenario; this conclusion
assumes that the Puccios and their corporations were
accrual-basis taxpayers.

If they were cash-basis taxpayers,

then arguably Plaintiff would not be permitted to claim a
deduction unless and until the QSF actually paid out funds
to the victims.

The record at this stage is unclear as to

exactly how the Puccios and their corporations handled their
tax obligations.

It is therefore fairest to view the facts

in the light most favorable to Plaintiff and, thus, set the
limitation on damages at the amount paid into the QSF.
Finally, in the event that this court adopts the R&R in
its entirety, as it will, Plaintiff requests that the court
certify the question of the scope of potential damages for
immediate interlocutory appeal pursuant to 28 U.S.C. §
1292(b).

Certification would not be proper for two reasons.

First, the issue of the scope of potential damages is not,
in the court’s view, a controlling question of law upon
which there is “a substantial ground for difference of
opinion.”

Second, as currently configured, this case is now

quickly approaching a stage where it will be ripe for a
prompt disposition that will permit both parties to take an
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appeal of all the issues raised by this complex case to the
Court of Appeals, if they wish to do so.
III.

CONCLUSION

Much of Plaintiff’s argument understandably rests on
its view of the equities of this controversy and the
sympathetic position of the victims of the Puccios’
unscrupulous fraud.

But Plaintiff is not the only one

wearing the white hat.

The taxpayers of the United States

are being asked to disgorge millions of dollars in taxes
properly assessed (at least at the time) upon income that
the Puccios received, enjoyed, and are very unlikely ever to
pay back.

Little risk of any windfall to the government

exists here.

As so often happens, the equities are simply

not all on one side.
As the court noted at the outset, it is not necessary
in this somewhat truncated memorandum to reprise all the
arguments and authorities contained in Judge Neiman’s
meticulous R&R.

Its contents are incorporated into this

memorandum and into the court’s ruling.

For the reasons

summarized above, the Report and Recommendation of the
Magistrate Judge (Dkt. No. 35), upon de novo review, is
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hereby ADOPTED in its entirety.

Defendant’s motion to

dismiss (Dkt. No. 12) is hereby ALLOWED in part, as to the
question of the scope of potential damages, and is otherwise
DENIED.

The case is referred to Magistrate Judge Neiman for

a pretrial scheduling conference.
It is so ordered.

/s/ Michael A. Ponsor
MICHAEL A. PONSOR
U. S. District Judge

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