SAVIDGE v. UNITED STATES
Filing
28
OPINION. Signed by Judge Noel L. Hillman on 10/31/2018. (dmr)
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
GERALD R. SAVIDGE, Trustee of
the Phyllis W. Souders Trust
U/A Dated 9/11/97,
Civil No. 16-8705 (NLH/JS)
OPINION
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.
APPEARANCES:
STEVEN J. JOZWIAK
523 HOLLYWOOD AVE.
SUITE 206
CHERRY HILL, NJ 08002
Attorney for Plaintiff Gerald R. Savidge, Trustee Phyllis
R. Souders Trust U/A Dated 9/11/97
NISHANT KUMAR
U.S. DEPARTMENT OF JUSTICE
TAX DIVISION
555 4TH STREET NW
ROOM 6833
WASHINGTON, DC 20001
Attorney for Defendant United States of America
HILLMAN, District Judge
The instant matter is a refund suit brought by a taxpayer
against the United States of America.
Presently before the
Court are cross-motions for summary judgment, which have both
been fully briefed.
For the reasons expressed below,
Defendant’s Motion for Summary Judgment will be granted and
Plaintiff’s Motion for Summary Judgment will be denied.
BACKGROUND
This Court takes its recitation of facts from Plaintiff’s
and Defendant’s Local Civil Rule 56.1 statements.
This Court
Phyllis W. Souders 1
will note any dispute where applicable.
brought an action in the 1990s against the South Carolina Public
Service Commission (d/b/a Santee Cooper) in the United States
District Court for the District of South Carolina (the “Santee
Cooper Litigation”).
Phyllis Souders sued for damages suffered
to her property (the “Property”) as a result of severe flooding
caused by Santee Cooper’s work on a nearby hydroelectric
project.
After many years of litigation, United States District
Judge Patrick Michael Duffy held a binding mediation hearing
from November 18 to November 21, 2008.
As a result, the South
Carolina District Court ordered judgment entered against Santee
Cooper and in favor of Phyllis Souders “in the amount of
$304,750.00, plus 8% interest from the date of flooding to the
date of this Order, and $40,000.00 on the trespass cause of
action.”
1
The interest totaled $747,572. 2
By the time judgment
Her surname is misspelled in the case caption as “Sauders.”
2
Plaintiff has attempted to characterize this award as a
mediation or a settlement. The facts do not support this
2
was entered in 2009, Phyllis Souders was deceased.
The Estate of Phyllis Souders (the “Estate”) received the
above award.
The Estate distributed $724,133 to the Phyllis W.
Souders Trust U/A Dated 9/11/97 (the “Trust”), which was the
sole beneficiary of the Estate.
Plaintiff, Gerald R. Savidge,
is both the Executor of the Estate and the Trustee of the Trust.
The tax treatment of this interest is where the dispute between
the parties lies.
For the tax year ending January 31, 2010, the Estate
submitted an income tax return reporting $747,572 of “interest
income” – described as “Santee Cooper – Interest on Litigation”
– and, after deducting administrative expenses, reported
distributing the remaining $724,133 to the Trust.
The Estate
also passed a $409,919 excess deduction to the Trust.
Since the
South Carolina District Court awarded $344,750 for damages and
trespass to the Property at issue, there was a “net capital
loss” to the Estate’s basis in the Property in the previously
mentioned excess deduction amount.
After reporting the interest
income and capital loss, the Trust reported owing $107,778 in
characterization, as the parties submitted to binding mediation
and Judge Duffy entered an order. While the parties may have
voluntarily entered into the binding mediation proceedings,
Plaintiff presents no facts suggesting that the Order merely
evidences a voluntary settlement. In fact, the binding nature
of the mediation suggests the amount awarded by Judge Duffy was
involuntarily given.
3
taxes and paid that amount to the United States.
In May 2013, the Estate submitted an amended return for the
above-described tax year.
This return omitted both the interest
income and “long-term capital loss” that was reported in the
previous return and stemmed from the Santee Cooper Litigation.
The Trust treated the interest income and long-term capital loss
in the same way, and did not include either on the amended
return.
Both the Trust and the Estate provided the below
explanation for the amended filing:
The reported interest income was received from the
S.C. Public Service Commission. It was reported as
taxable interest instead of federal and S.C. tax free
municipal interest.
The award for property damage has been removed from
the Schedule D since it reflects only a return of
basis on property still owned by the Estate and was
inappropriately included in the original filing.
The adjustments to this return relates to these
charges.
After submittal of the amended returns, the accountant who
prepared them for both entities followed up in December 2013
requesting “written verification of the status of the return.”
The Internal Revenue Service (“IRS”) sent a letter to the Estate
in response.
The letter was in regard to the tax period “Aug.
31, 2009” and stated: “Thank you for your inquiry of December 5
2013.
We corrected your account based on the information you
4
provided.” 3
No further action was taken by the IRS.
No refund
was issued.
Plaintiff filed his complaint against the United States on
November 22, 2016.
Defendant, after withdrawing a motion to
dismiss, filed an answer on July 7, 2017.
Discovery ensued.
Cross-motions for summary judgment were filed by the parties on
March 15, 2018.
Both have been fully briefed and are ripe for
adjudication.
ANALYSIS
A.
Subject Matter Jurisdiction
This Court has jurisdiction under 28 U.S.C. § 1346(a)(1) as
this is a civil action brought against the United States for
“the recovery of . . . internal-revenue tax alleged to have been
erroneously or illegally assessed or collected . . . .”
B.
Standard on Motion for Summary Judgment
Summary judgment is appropriate where the Court is
satisfied that “‘the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the
3
What this ambiguous statement from the IRS means is unclear.
The only record evidence that either party has pointed to – the
deposition testimony of the Trust’s accountant - suggests that
this statement from the IRS merely meant that it had received
the amended return. Plaintiff offers no support for its bald
assertion that the IRS had decided the amended return required
it to refund the previously paid tax. The fact that the United
States vigorously contents Plaintiff’s claims suggests
otherwise.
5
affidavits if any,’ . . . demonstrate the absence of a genuine
issue of material fact” and that the moving party is entitled to
a judgment as a matter of law.
Celotex Corp. v. Catrett, 477
U.S. 317, 322-23 (1986) (citing FED. R. CIV. P. 56).
An issue is “genuine” if it is supported by evidence such
that a reasonable jury could return a verdict in the nonmoving
party’s favor.
248 (1986).
Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
A fact is “material” if, under the governing
substantive law, a dispute about the fact might affect the
outcome of the suit.
Id.
“In considering a motion for summary
judgment, a district court may not make credibility
determinations or engage in any weighing of the evidence;
instead, the non-moving party’s evidence ‘is to be believed and
all justifiable inferences are to be drawn in his favor.’”
Marino v. Indus. Crating Co., 358 F.3d 241, 247 (3d Cir. 2004)
(citing Anderson, 477 U.S. at 255).
Initially, the moving party bears the burden of
demonstrating the absence of a genuine issue of material fact.
Celotex, 477 U.S. at 323 (“[A] party seeking summary judgment
always bears the initial responsibility of informing the
district court of the basis for its motion, and 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
6
of a genuine issue of material fact.”); see Singletary v. Pa.
Dep’t of Corr., 266 F.3d 186, 192 n.2 (3d Cir. 2001) (“Although
the initial burden is on the summary judgment movant to show the
absence of a genuine issue of material fact, ‘the burden on the
moving party may be discharged by “showing” — that is, pointing
out to the district court — that there is an absence of evidence
to support the nonmoving party’s case’ when the nonmoving party
bears the ultimate burden of proof.” (citing Celotex, 477 U.S.
at 325)).
Once the moving party has met this burden, the nonmoving
party must identify, by affidavits or otherwise, specific facts
showing that there is a genuine issue for trial.
U.S. at 324.
Celotex, 477
A “party opposing summary judgment ‘may not rest
upon the mere allegations or denials of the . . . pleading[s].’”
Saldana v. Kmart Corp., 260 F.3d 228, 232 (3d Cir. 2001).
For
“the non-moving party[] to prevail, [that party] must ‘make a
showing sufficient to establish the existence of [every] element
essential to that party’s case, and on which that party will
bear the burden of proof at trial.’”
Cooper v. Sniezek, 418 F.
App’x 56, 58 (3d Cir. 2011) (citing Celotex, 477 U.S. at 322).
Thus, to withstand a properly supported motion for summary
judgment, the nonmoving party must identify specific facts and
affirmative evidence that contradict those offered by the moving
party.
Anderson, 477 U.S. at 257.
7
C.
Defendant’s Motion for Summary Judgment
This Court will first address Defendant’s Motion for
Summary Judgment.
This motion presents two arguments. 4
Defendant argues its defenses are not time-barred.
First,
Second,
Defendant argues the interest income was properly taxed in the
first return.
This Court will address each argument in turn.
a. Statute of Limitations
Plaintiff’s central argument throughout the course of this
litigation asserts that in cases where an amended return
reducing a tax liability is filed, once the statute of
limitations has expired under 26 U.S.C. § 6501, the IRS must
accept the amended return and forfeit the tax previously paid if
it has taken no action.
Plaintiff continues to rely on this
argument at the summary judgment stage.
In relevant part, 26
U.S.C. § 6501(a) states: “the amount of any tax imposed by this
title shall be assessed within 3 years after the return was
filed.”
In response, Defendant argues that the IRS is not timebarred from disputing the accuracy of an amended return under 26
U.S.C. § 6501.
It cites Lewis v. Reynolds and its progeny,
4
Defendant also argues that any additional bases for refund not
disclosed in the complaint cannot be argued on a motion for
summary judgment. This Court will not address this third
argument, as Plaintiff does not raise additional arguments and
because the decision on Defendant’s first two arguments further
moots this third argument.
8
which together stand for the proposition that, even though “the
statute of limitations may have barred the assessment and
collection of any additional sum, it does not obliterate the
right of the United States to retain payments already received
when they do not exceed the amount which might have been
properly assessed and demanded.”
284 U.S. 281, 283 (1932).
See
also Morristown Trust Co. v. Manning, 104 F. Supp. 621, 628
(D.N.J. 1951) (“[I]n acting upon a claim for refund . . . the
Commissioner has authority to reaudit the return and to reject
the claim if the redetermaination does not show an overall
overpayment even though the statute of limitations prevents him
from making an additional assessment for the year involved.”).
Plaintiff’s argument contradicts the clear terms of the
statute and decades of precedent.
Although 26 U.S.C. § 6501(a)
prohibits the IRS from assessing additional taxes after more
than three years have elapsed from the filing of a return, it is
silent on a statute of limitations for refund actions.
Here,
that tax was assessed and collected within three years.
Defendant is not assessing any more tax for the tax year at
issue, but merely refuses to refund that which was already paid.
The Third Circuit previously rejected a claim similar to
Plaintiff’s claim, saying “section 6501(a) directs only that
taxes ‘be assessed within 3 years after the return was filed.’ .
. . A deficiency determination, by which the IRS seeks to
9
establish the taxpayer’s additional tax liability, is patently
different from a refund determination, by which the taxpayer
seeks repayment or credit from the IRS.”
Bachner v.
Commissioner, 81 F.3d 1274, 1277 (3d Cir. 1996) (emphasis in
original).
As highlighted above, the case law 5 supports
Defendant’s position that 26 U.S.C. § 6501, even if applicable,
does not bar the United States from resisting a refund claim.
Thus, this Court rejects Plaintiff’s central argument.
Plaintiff argues, in the alternative, that even if this
Court is not barred from determining the tax liability of a
taxpayer who is a party to the action, this Court is barred from
determining the tax liability of a taxpayer who is a non-party.
Defendant argues in its reply brief that a determination of a
non-party’s, here the Estate’s, tax liability is not required.
Instead, it asserts, the Court need only look so far as the
5
In his reply brief, Plaintiff argues the case law cited by
Defendant is distinguishable. While the facts of Defendant’s
cases do differ from those presented here, Plaintiff does not
address why the United States is barred from keeping Defendant’s
payment. The case law specifically addresses a situation where
a taxpayer brings a refund suit after the statute of limitations
for the government to assess additional tax has passed. In
those situations, the government is only restricted from
assessing more tax, not retaining the tax already paid – unless
the taxpayer proves overpayment. The rule is logical, as it is
the taxpayer who self-reports the tax owed. The government
should not be restricted in litigation just because the taxpayer
made a mistake and rested on its claim for a refund until after
the government’s assessment window under 26 U.S.C. § 6501(a) has
elapsed.
10
Trust’s tax liability to determine whether or not a refund is
required.
Defendant is correct.
Even though the Trust reported its
tax liability in the same manner as the Estate, the Trust’s
return and amended return gives this Court enough information to
determine this case.
Plaintiff does not show this Court what
information on the Estate’s return is needed for it to make this
decision.
The Trust’s amended tax return states the reason for
amendment and the source of the interest income.
Moreover, the
case law shows no limitation – and Plaintiff offers nothing in
rebuttal - that would prohibit this Court from examining the
Estate’s returns to determine the merits of this action.
Even
if this Court were required to look at the Estate’s returns to
gather enough facts to decide the merits of this case, there is
no bar. 6
This Court determines the merits of the refund claim
brought by the Trust.
To the extent its decision may affect the
return filed by the Estate is of no moment.
It is the Executor
of the Estate who must determine whether any legal obligation
arises to amend the return after entry of an order effectuating
6
In fact, both Trust returns may be seen to incorporate by
reference the Estate returns. So, it seems, the Trust has put
the Estate’s return at issue in this case. It cannot now
complain if the Court examines the Estate’s return in analyzing
the arguments of the parties.
11
this Opinion.
b. Tax Implications of Interest Income Received by the
Trust
Now that this Court has determined there is no statute of
limitations issue it may decide the merits of this case.
Defendants insist that no refund is appropriate.
The United
States argues this type of interest income is not tax-exempt and
it was correctly taxed.
Plaintiff does not argue the merits of whether the interest
income is tax exempt or taxable.
Instead, Plaintiff argues
there are questions of material fact remaining to be decided.
First, Plaintiff argues there is a question of material fact as
to whether the interest income was pursuant to a court order or
settlement or mediation.
Second, Plaintiff argues there is a
question of material fact as to whether the statute of
limitations bars the United States from resisting refund.
Before discussing the merits of Defendant’s argument, this
Court will dispose of Plaintiff’s two arguments.
income was granted pursuant to court order.
The interest
Although the
hearing that Judge Duffy held was a “binding mediation,” he
ordered the interest income.
This was not a voluntary
settlement pursuant to party negotiations or mediation.
Plaintiff does not bring forth any documents that would suggest
12
otherwise. 7
Plaintiff’s second argument is not a dispute of
fact, but a dispute of law.
As explained supra, the statute of
limitations is inapplicable to this action.
Even though Plaintiff has not presented argument rebutting
Defendant’s argument on the merits, Defendant must still meet
the standard for summary judgment.
See Celotex, 477 U.S. at 323
(“[A] party seeking summary judgment always bears the initial
responsibility of informing the district court of the basis for
its motion, and 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.”).
As explained infra, Defendant has met this standard.
The material facts are not in dispute.
Litigation ended via binding mediation.
The Santee Cooper
At the conclusion of
that mediation, the Court ordered Santee Cooper to pay interest
on the judgment.
The interest stems not from a governmental
bond or voluntary borrowing agreement, but because Santee Cooper
had been involuntarily found liable for a wrong and a federal
judge determined that interest must be paid to fully right the
wrong.
7
The docket Plaintiff attaches to its filings only reinforces
this finding. Moreover, the discussion infra will show
Plaintiff’s distinction is unsupported by the case law.
13
“The ultimate question presented for decision, upon a claim
of refund, is whether the taxpayer has overpaid his tax.”
Lewis, 284 U.S. at 283.
In a tax refund suit, “the plaintiff
bears the burden of proving that it has overpaid its taxes for
the year in question in the exact amount of the refund sought.”
Wells Fargo & Co. & Subsidiaries v. United States, 91 Fed. Cl.
35, 75 (2010) (citing Helvering v. Taylor, 293 U.S. 507, 515
(1935); Lewis, 284 U.S. 281; Dysart v. United States, 169 Ct.
Cl. 276 (1965)).
The Court conducts this review de novo.
Id.
See also R.E. Dietz Corp. v. United States, 939 F.2d 1, 4 (2d
Cir. 1991) (“[T]he court does not sit in judgment of the
Commissioner; the court places itself in the shoes of the
Commissioner.”).
The IRC section at issue is 26 U.S.C. § 103.
Generally,
Section 103 exempts from taxation interest on state and local
bonds, which are defined as “an obligation of a State or
political subdivision thereof.”
Generally, tax exemptions
“should be construed narrowly.”
DeNaples v. Commissioner, 674
F.3d 172, 176 (3d Cir. 2012) (In re Hechinger Inv. Co. of Del.,
Inc., 335 F.3d 243, 259 (3d Cir. 2003)).
Case law interpreting this section has explicitly excluded
interest that is not incurred via the borrowing power of the
states.
Helvering v. Stockholms Enskilda Bank, 239 U.S. 84, 86-
87 (1934).
The test in the Third Circuit hinges on whether the
14
“interest obligation arose by operation of law or by voluntary
bargaining.”
DeNaples, 674 F.3d at 177.
In other words, “when
the state pays interest at a fixed rate pursuant to a statutory
or judicial command, it is plainly not excludable under Section
103 . . . .”
Id. 8
Although the interest payment was pursuant to
mediation, it was a binding mediation and the judgment was
entered via court order.
The interest income does not qualify
for this tax exemption.
Plaintiff is not entitled to a refund.
Thus, Defendant’s Motion for Summary Judgment will be granted
and Plaintiff’s sole claim in this case will be dismissed.
c. Plaintiff’s Other Statutory Arguments
Within his briefing on these cross-motions, Plaintiff
presents two additional arguments that this Court must address.
First, Plaintiff argues under 26 U.S.C. § 6034A(c)(1) he was
required to report the Trust’s return in the same manner as the
Estate’s return.
This is a red herring.
Plaintiff is both
Executor and Trustee, so he had the ability – and obligation –
to approve both the Estate’s and the Trust’s returns and amended
returns.
Unlike his analogy to a third-party company providing
a shareholder with a 1099-DIV, it appears the Estate and Trust
8
As case law from the other Circuits (and the Supreme Court)
explains, the policy behind Section 103 “is to encourage loans
in aid of governmental borrowing power.” Drew v. United States,
551 F.2d 85, 87 (5th Cir. 1977). Clearly, the interest imposed
was not to encourage a loan, but to right a wrong committed by
the state.
15
were separate in name only.
All the assets of the Estate went
to the Trust, and Plaintiff was a fiduciary to both.
Regardless, Plaintiff is not being accused of tax fraud,
but being refused a refund.
What the Trust reported on its
amended return, and whether it matches the Estate’s amended
return is an ancillary issue.
The Trust reported it owed taxes;
then the Trust reported it did not owe taxes.
determines it did owe taxes.
This Court
No further analysis of this
statutory provision is necessary.
Second, Plaintiff argues another red herring under 26
U.S.C. § 7491(a).
The statute here states the burden shifts to
the United States after “a taxpayer introduces credible evidence
with respect to any factual issue relevant to ascertaining the
liability of the taxpayer for any tax imposed by subtitle A or B
. . . .”
26 U.S.C. § 7491(a).
Plaintiff has produced no
credible evidence showing the Trust does not owe the tax it
previously paid.
States.
The burden has not shifted to the United
But, even if it did, the United States has shown with
credible, publicly available evidence and the Trust’s own tax
returns that no refund should be given.
D.
Plaintiff’s Motion for Summary Judgment
Because Plaintiff relies upon the same grounds he did in
resisting Defendant’s Motion for Summary Judgment in his own
Motion for Summary Judgment, this Court will not engage in a
16
separate analysis.
For the reasons discussed supra, this Court
will deny Plaintiff’s Motion for Summary Judgment.
CONCLUSION
For the reasons set forth in this Opinion, this Court will
grant the Defendant’s Motion for Summary Judgment and deny the
Plaintiff’s Motion for Summary Judgment.
An appropriate Order will be entered.
Date: October 31, 2018
At Camden, New Jersey
s/ Noel L. Hillman
NOEL L. HILLMAN, U.S.D.J.
17
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