281 F.3d 1108 (10th Cir. 2002), 00-3013, Rogers v. United States

Docket Nº:00-3013, 00-3030
Citation:281 F.3d 1108
Party Name:ROBERT B. ROGERS, Successor Executor for the estate of Ewing M. Kauffman, and JULIA IRENE KAUFFMAN, Executrix for the Estate of Muriel I. Kauffman, Plaintiffs-Appellants, v. UNITED STATES OF AMERICA, Defendant-Appellee.
Case Date:February 22, 2002
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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Page 1108

281 F.3d 1108 (10th Cir. 2002)

ROBERT B. ROGERS, Successor Executor for the estate of Ewing M. Kauffman, and JULIA IRENE KAUFFMAN, Executrix for the Estate of Muriel I. Kauffman, Plaintiffs-Appellants,

v.

UNITED STATES OF AMERICA, Defendant-Appellee.

Nos. 00-3013, 00-3030

United States Court of Appeals, Tenth Circuit

February 22, 2002

Page 1109

[Copyrighted Material Omitted]

Page 1110

Kelley D. Sears (Stanley P. Weiner, Sylvan Siegler and Susan A. Berson, with him Page 1111

on the briefs), Shook, Hardy & Bacon L.L.P., Kansas City, Missouri, for Plaintiffs-Appellants.

Kenneth W. Rosenberg, Attorney, Tax Division, (Eileen J. O'Connor, Assistant Attorney General, James E. Flory, United States Attorney, and Richard Farber, Attorney, Tax Division, with him on the briefs), United States Department of Justice, Washington, D.C., for Defendant-Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

(D.C. NO. 97-CV-2666-JWL)

Before BRORBY, HOLLOWAY, and HENRY, Circuit Judges.

HENRY, Circuit Judge.

Plaintiffs-Appellants Robert B. Rogers and Julia I. Kauffman ("the taxpayers") brought this tax refund suit appealing the denial by the Internal Revenue Service of a bad debt deduction. The district court granted summary judgment in favor of the United States on the issue of the characterization of the transaction forming the basis for the requested bad debt deduction. See Rogers v. United States, 58 F.Supp.2d 1235 (D. Kan. 1999) ("Rogers I"). The taxpayers now appeal that ruling. The taxpayers also appeal the portion of a subsequent summary judgment ruling in which the district court denied them a partial refund for overpaid taxes under the doctrine of equitable recoupment. See Rogers v. United States, 76 F.Supp.2d 1159 (D. Kan. 1999) ("Rogers II"). Finally, the taxpayers appeal the district court's denial of their motion to strike the reports and testimony of one of the government's expert witnesses. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm the summary judgment orders of the district court and decline to address the expert witness issue.

I. BACKGROUND

Because the facts of this case were set forth at length in the district court's opinion, see Rogers I, 58 F.Supp.2d at 1236-39, we will repeat them here in less detail. This case arises from a series of transactions between Ewing M. Kauffman, the deceased former owner of the Kansas City Royals Major League Baseball franchise (the "Royals"), and Avron B. Fogelman, a former part owner of the Royals. In 1983, Mr. Kauffman was the sole owner of the Royals, which was organized as an S corporation pursuant to Internal Revenue Code ("I.R.C.")

§ 1361. At that time, Mr. Kauffman sold a 49 percent interest in the team to Mr. Fogelman for $10 million. For an additional $1 million, Mr. Kauffman also sold Mr. Fogelman an option to purchase Mr. Kauffman's remaining 51 percent interest in the team. The option exercise price was $10 million. In 1987, Mr. Kauffman also sold Mr. Fogelman an additional 1 percent of the team--leaving each with a 50 percent interest--without disturbing Mr. Fogelman's option.

Beginning in 1987, Mr. Fogelman experienced severe financial difficulties in his real estate business which resulted in him owing almost $1 billion to his creditors. His only unencumbered asset was his interest in the Royals. He began negotiating with the team in order that he might use that interest to obtain cash to fund a reorganization of his other business interests. After protracted and contentious negotiations--which also involved Major League Baseball and Mr. Fogelman's creditors--the parties reached an agreement on July 31, 1990.

Under this agreement, as characterized by the parties involved in the transaction, Mr. Kauffman lent $34 million to the Royals, which in turn lent $34 million to Mr. Fogelman. This nonrecourse loan was secured by Mr. Fogelman's ownership interest in the Royals and his option to purchase the rest of the team. Mr. Page 1112

Fogelman's nonrecourse note to the team was due on January 3, 1991, unless the team was sold before that date at an auction the parties agreed to hold. In addition, Mr. Fogelman granted the Royals an option (the "KCRBC Option") to purchase both his share of the team and his option to buy Mr. Kauffman's share.

The Royals "exercised" this option contemporaneously with the execution of the agreement on July 31, 1990 but deferred the "closing" of the option until January 4, 1991. Under the terms of this option, the purchase price for Mr. Fogelman's interest would be "an amount equal to the principal balance outstanding and all accrued, unpaid interest on the KCRBC Loan on the KCRBC Option Closing Date."1 Aplts' App. vol. IV, at 555 (Article VII of July 31, 1990 Kansas City Royals "Stockholders [sic] Agreement," setting forth terms of the KCRBC Option). The parties dispute, however, what would have occurred with this option in the event that Mr. Fogelman had repaid the full amount of the loan.

The auction process, conducted by J.P. Morgan & Co., was held in the fall of 1990. As the interests of both Mr. Kauffman and Mr. Fogelman were for sale, the entire team was available for a minimum bid price of approximately $80 million. Although several parties initially expressed interest, there were no bidders, and J.P. Morgan subsequently issued an opinion asserting that Mr. Fogelman's 50% interest in the team was of only "nominal" value. See Aplts' App. vol. III, at 309.

On January 3, 1991, the repayment date of the nonrecourse note, Mr. Fogelman signed an agreement in which he transferred his Royals interest to the team in lieu of its foreclosure on the note. Although this was only six months after the Royals had "loaned" $34 million secured by this stock without recourse (i.e., made a loan assuming the stock had at least $34 million in value), the Royals claimed this collateral as being without value based on J.P. Morgan's assessment and subsequently deducted the full amount of the note, plus interest, as a bad debt pursuant to I.R.C. § 166. Because of the Royals' S Corporation status, this loss was passed through to Mr. Kauffman, who deducted it from his 1991 joint individual tax return. The Internal Revenue Service later denied the deduction and assessed additional taxes because it determined that the transaction claimed as the basis of the bad debt question was in substance a redemption of Mr. Fogelman's Royals stock and not a loan. After paying that assessment and mounting an unsuccessful administrative challenge, the taxpayers brought this action.

Before trial, both sides moved for summary judgment on the issue of whether the transaction was properly characterized as a loan or as a sale. In response to these motions, the district court ruled that the government's position in the suit was "properly characterized as a substance over form argument." Rogers I, 58 F.Supp.2d at 1240. The court cited a number of cases in support of the proposition that "[i]n applying this doctrine of substance over form, the [Supreme] Court has looked to the objective economic realities of a transaction rather than to the particular form the parties employed." Id. (quoting Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978)) (citations omitted).

The district court further concluded that Page 1113

the plaintiffs' attempt to characterize the transfer of $34 million to Mr. Fogelman as a debt is improper because the economic realities of the transaction, even granting the plaintiffs all the factual inferences to which they are entitled, overwhelmingly dictate the legal conclusion that a sale, or more properly, a redemption of Mr. Fogelman's Royals stock, and not a loan, took place.

Id. at 1241 (emphasis added). After reviewing the facts of the case and deciding that there were no material issues remaining, the court granted summary judgment in favor of the United States on the issue of the characterization of the transaction.

In response to this ruling, the taxpayers filed a summary judgment motion to recover a refund for various tax payments they had incurred on the basis of treating the transaction as a loan and not a redemption. Since any refund of these payments was barred by the statute of limitations, the taxpayers requested that the court apply the doctrine of equitable recoupment. The district court ruled partially in favor of the taxpayers and partially in favor of the government on this motion. See Rogers II, 76 F.Supp.2d at 1173.

Finally, the taxpayers filed a motion during the course of the litigation to strike the reports of and preclude testimony from four of the government's expert witnesses. The district court denied the taxpayers' motion with respect to three of the four designated experts, including Mr. Andrew Zimbalist.

The taxpayers now appeal the district court's grant of summary judgment in favor of the government with respect to the characterization of the transaction as a sale. The taxpayers also appeal the portion of the district court's grant of summary judgment in favor of the government relating to the refund requested under the doctrine of equitable recoupment and the district court's ruling with respect to the expert testimony of Mr. Zimbalist. We now affirm the district court's summary judgment orders and decline to address the issue of Mr. Zimbalist's expert testimony.

II. DISCUSSION

A. Characterization of the Transaction on Summary Judgment

1. Standard of Review

We review the district court's grant of summary judgment de novo, "applying the same legal standard as the district court" under Fed. R. Civ. P. 56(c). David v. City & County of Denver, 101 F.3d 1344, 1355 (10th Cir. 1996). We must resolve factual disputes and draw...

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