Cotto-Vazquez et al v. United States of America

Filing 54

OPINION AND ORDER DENIED re 29 MOTION to dismiss the Amended Complaint's Third Count for Lack of Subject Matter Jurisdiction as to All Plaintiffs filed by United States of America and 37 Request for Stay Motion, filed by Miguel Angel Cotto-Vazquez, Melissa Guzman-Quinones. Signed by US Magistrate Judge Silvia Carreno-Coll on 2/27/2018.(mcv) Modified to correct document type on 2/28/2018 (idg).

IN THE UNITED STATES COURT
FOR THE DISTRICT OF PUERTO RICO

COTTO-VAZQUEZ, ET AL.
Plaintiffs,
v.

CIV. NO.: 16-2807 (SCC)

UNITED STATES OF AMERICA, ET
AL.
Defendants.
OPINION AND ORDER
Miguel Angel Cotto-Vázquez and his wife, Melissa
Guzmán-Quiñones sued the United States of America, the
Commissioner of the Internal Renevue Service (“IRS”), and
the IRS, seeking a refund of $2,505,060.31 for overpaid taxes
and penalties. The United States of America moved to dismiss
the Amended Complaint’s Third Court for lack of subject
matter jurisdiction. See Docket No. 29. Plaintiffs filed an
opposition or, in the alternative, a request to stay the

COTTO-VAZQUEZ v. USA

Page 2

adjudication of the Motion to Dismiss. Docket No. 37. 1 A
reply and sur-reply followed. Docket Nos. 41 and 45.
I. Background
Plaintiff Miguel Cotto is a professional boxer. During his
career, Mr. Cotto signed a Promotional Agreement and
several Championship Bout Agreements with an entity
known as Top Rank, Inc. (“Top Rank”). See Docket No. 26 at
pg. 4. Mr. Cotto obtained compensation for those agreements.
Id.
Prior to filing this action, Mr. Cotto and his wife spent
approximately seven years litigating an administrative claim
for refund before the IRS. They sought a refund of
$6,829,161.30, alleging that they had overpaid taxes, interests,
and penalties, attributable to tax years ending in December
31, 2005, through 2008. See Docket No. 29-2. After an adverse
determination and subsequent appeal, plaintiffs filed suit in
1 Plaintiffs argue that in order to fully develop an argument in opposition
to the motion to dismiss, they need some discovery that is still
outstanding. Accordingly, they seek a stay until discovery of the
administrative documents is completed. Docket No. 37.

COTTO-VAZQUEZ v. USA

Page 3

federal court. Docket Nos. 1 and 26. The Amended
Complaint’s Third Cause of Action, which is the only count
that defendants seek to dismiss, claims a refund for
overpayment of taxes attributable to the exploitation of Mr.
Cotto’s intangible property rights for $1,084,975. Docket No.
26 at pg. 20.
II. Analysis
The defendant challenges the Court’s subject matter
jurisdiction over Count III of the Amended Complaint. The
United States avers that the claims included substantially
vary from the claims raised in plaintiffs’ administrative
refund claim $1,084,875.00.
Pursuant to 26 U.S.C. § 7422(a), no taxpayer may bring a
suit in federal court to recover a tax refund unless a claim for
refund or credit has already been filed with the IRS. The
regulations direct that requests for tax refunds will only be
granted in certain circumstances and require that the claim
“set forth in detail each ground upon which a credit or a
refund is claimed and facts sufficient to apprise the

COTTO-VAZQUEZ v. USA

Page 4

Commissioner of the exact basis thereof.” 26 C.F.R.§ 301.64022(b)(1). In a tax refund suit, “[t[hese rules have been
interpreted as creating a ‘substantial variance’ rule,” which
precludes

a

taxpayer

from

presenting

claims

that

substantially vary the legal theories and factual basis
contained in his administrative claim. See Frank Armstrong, Jr.
Trust ex rel. Armstrong v. U.S., 132 F.Supp.2d 421, 424-25
(W.D.Va. 2001)(citing Lockheed Martin Corp. v. United States,
210 F.3d 1366, 1371 (Fed.Cir.2000)).
Our task is to examine the administrative documents on
the record, and determine whether plaintiffs advanced to the
IRS their legal theory for refund on taxes paid on
compensation received from the exploitation of Mr. Cotto’s
“intangible rights.” If plaintiffs’ failed to allege with sufficient
specificity

their

intangible

rights

claim

during

the

administrative proceedings, they forfeited their right to
include that claim in the federal suit. 2
2 According to the Government, plaintiffs’ motion “merely mention[ed]
an assignment of intangible rights as a ‘condition’ to compensation.”

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Page 5

“In a refund suit the taxpayer bears the burden of proving
the amount he is entitled to recover.” United States v. Janis, 428
U.S. 433, 440 (1976)(citing Lewis v. Reynolds, 284 U.S. 281, 52
S.Ct. 145, 76 L.Ed. 293 (1932)); see also, United States v. Rexach,
482 F.2d 10, 17 (1st Cir. 1973)(in tax collection actions, “the
burdens of both going forward and ultimate persuasion are
on the taxpayer.”).
Our starting point is Count III of the Amended Complaint,
which claims a refund of $1,084,875.00. Plaintiffs’ refund
claim is predicated on an argument that the gains from the
sale of Mr. Cotto’s intangible property rights, i.e. his name,
image and likeness, comes from Top Rank’s right to exploit
these rights in perpetuity. Mr. Cotto posits that he transferred
or sold his rights, including his intangible property rights, to
Top Rank. Therefore, he moves the Court to allocate a portion
of the Agreement Compensation to the sale of his intangible
property rights. Mr. Cotto proposes that 25% of the
Docket No. 42 at pg. 5.

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Page 6

compensation “should be earmarked for the gain from the
sale of his intangible property rights.” Docket No. 26 at pg. 22.
In the alternative, he asks that the grant of his intangible
property rights be considered a license. According to Mr.
Cotto, gains from the exploitation of these rights should be
sourced by his residence, Puerto Rico.
The government counters that Mr. Cotto did not present
any of these claims to the IRS during the administrative
proceeding. Instead, plaintiffs “exclusively relied on a timebasis allocation method to allocate income to Puerto Rico
based on 26 C.F.R. § 1.861-4(b)(2)(i).” See Docket No. 42 at pg.
3.
However, a review of plaintiffs’ Refund Claim, (the
“Claim”), dated January 21, 2014 shows that they relied on
other theories beyond the time-basis allocation. See Docket
No. 29-2. In page 2 of the Claim, plaintiffs state that their
refund claim is based, partly, on the rights granted to Top
Rank. According to the document: “Under the contract
provisions, Mr. Cotto is also granting Top Rank many rights

COTTO-VAZQUEZ v. USA

in

exchange

compensation

for

Page 7

the

compensation.

attributable

to

such

Therefore,

rights

should

the
be

considered to determine the proper source of income.” Id.
In stating their position, plaintiffs state the following: “The
IRS-PR proposed adjustments do not consider the fact that the
compensation received is related to services performed for a
period of time and not only attributable to the day of the
event. In addition, the IRS-PR did not consider the fact that
the compensation paid to Mr. Cotto includes the rights
granted to Top Rank.” 3 Id. at pg. 7. (Emphasis supplied).
On July 28, 2015, the IRS issued a determination letter
whereby they determined that all the income derived from
Mr. Cotto’s Championship Bout Agreement with Top Rank
was 100% US source income. See Docket No. 29-8 at pg. 2.
Subsequently, in their Request for Appeal dated August 26,
2015, Plaintiffs listed the six main reasons why they disagreed
with the IRS’s decision. Id. One of these six points was the

3 Including his intangible rights.

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Page 8

exploitation of Mr. Cotto’s intangible rights. 4 Id. at pg. 9. The
Appeal states:
Furthermore, with reference to personal rights
surrendered by Mr. Cotto, recent case law established
that when an athlete has a global image, name and
likeness rights, which was marketed within and [sic]
without the US, it would be unreasonable to determine
that the compensation associated with the assignment
of such personal rights be considered 100% US income.
Lastly, it is telling that the IRS discusses the theory
included in the Amended Complaint’s Count III in the
Appeals Case Memorandum. See Docket No. 37-1. At page 8,
the IRS frames one of the controversies as “the issue of the
proper allocation between endorsement income between
royalty and personal service income…” Id. Furthermore, the
IRS discusses the Kramer v. Commissioner case, in which the tax
court delved into the classification of royalties received by the
petitioner, a U.S. tennis champion. In Kramer, the tax court

4 Although the letter does not use the term “intangible rights”, it refers to
Mr. Cotto’s name, likeness, privacy, photographs and biographical
materials, which are all part of his intangible rights.

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Page 9

allocated 70 percent of the royalties received by Kramer as
compensation for the grant of use of his name, signature,
etc…, and 30 percent for payment of services that qualified as
“earned income.” Id. at page 9.
Finally, in the Discussion and Analysis section, the
Appeals Memorandum cites and analyzes the grant of rights
to use Mr. Cotto’s “image…name, likeness and biographical
materials”, pg. 16, and concludes that it was solely for the
purpose of advertising and promoting the bout. For that
reason, the IRS determined that “all of the consideration for
the bouts fought in the U.S. is U.S.-sourced income.” Id. at 18.
The analysis and case law cited support the proposition that
the IRS did consider and entertain Mr. Cotto’s Third Court
claims at the administrative level.
Therefore,

the

side-by-side

examination

of

the

administrative record and the Third Count leads me to
conclude that plaintiffs put the IRS on notice during the
administrative phase of the claims set forth in the Amended
Complaint.

COTTO-VAZQUEZ v. USA

Page 10

As a final point, we do not think it is necessary to delay
the ruling on this motion pending outstanding discovery.
There is sufficient information on the record to make a finding
of whether the substantive variance rule is applicable here.
Plaintiffs’ request to stay adjudication of the motion is denied.
III. Conclusion
I find that plaintiffs’ claims in Count III of the Amended
Complaint do not represent a substantial variation of the legal
theories and factual bases set forth in their administrative
claim. Therefore, the Motion to Dismiss is denied. Plaintiffs’
motion to stay is also denied.
IT IS SO ORDERED.
In San Juan, Puerto Rico, this 27th day of February, 2018.
S/ SILVIA CARREÑO-COLL
UNITED STATES MAGISTRATE JUDGE