Rogers v. U.S., 97-2666-JWL.

• Decision Date: 18 November 1999
• Docket Number: No. 97-2666-JWL.,97-2666-JWL.
• Parties: Robert B. ROGERS, Successor Executor for the Estate of Ewing M. Kauffman, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Kansas

76 F.Supp.2d 1159

Robert B. ROGERS, Successor Executor for the Estate of Ewing M. Kauffman, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

No. 97-2666-JWL.

United States District Court, D. Kansas.

November 18, 1999.

Kelley D. Sears, M. Kevin Underhill, Stanley P. Weiner, Susan A. Berson, Eric T. Nikkelson, Sylvan Siegler, Shook, Hardy & Bacon, L.L.P., Kansas City, MO, for plaintiffs.

Seth G. Heald, Charles P. Hurley, U.S. Dept. of Justice, Office of Special Litigation, Tax Division, Washington, DC, for defendant.

MEMORANDUM AND ORDER

LUNGSTRUM, District Judge.

This tax refund suit involves the Kansas City Royals Major League Baseball team, its former owner Ewing Marion Kauffman, now deceased, and former part-owner Avron B. Fogelman. The suit centers around a $34 million bad debt deduction taken by the Royals on a purported loan to Mr. Fogelman and passed through to the tax return of Mr. and Mrs. Kauffman. On June 10, 1999, the court issued a Memorandum and Order which determined that the purported loan was actually a sale or redemption of Mr. Fogelman's Royals interest on July 31, 1990 (Doc. 132). The court ordered the parties to notify it of any matters identified in the Final Pretrial Order which remained at issue. Accordingly, plaintiffs informed the court that the possibility of plaintiffs receiving a tax refund remained.

Now, the matter is before the court on plaintiffs' motion for summary judgment (Doc. 135). Also pending is defendant's motion to strike the affidavit of George P. "Rusty" Jandl or, in the alternative, for leave to depose Mr. Jandl and to retain its own expert tax calculation witness (Doc. 139). Defendant further moves to strike documents offered by plaintiffs in supplementation of their summary judgment motion (Doc. 146). For the reasons set forth below, plaintiffs' motion for summary judgment is denied in part, granted in part, and taken under advisement in part. Partial summary judgment is entered for defendant and defendant's motions to strike are taken under advisement.

I. Background

The facts of this case are substantially set forth in the court's June 10, 1999 order. Therefore, only facts applicable to the present proceeding are set forth here. This dispute rises out of an agreement executed on July 31, 1990 between Mr. Kauffman, the Royals, and Mr. Fogelman. The parties characterized the agreement as representing a $34 million loan from Mr. Kauffman to the Royals and a corresponding $34 million nonrecourse loan from the Royals to Mr. Fogelman. As a part of the transaction, Mr. Fogelman granted the Royals an option to purchase his 50% ownership interest in the Royals, as well as his option to purchase the remainder of the Royals stock, for a price equal to the outstanding balance of his alleged Royals loan. Although Mr. Fogelman also gave up many of the benefits of stock ownership during the period of the alleged loan, the parties agreed that he would maintain the right to enjoy the tax benefits of any losses the Royals might pass through to him. Mr. Fogelman "defaulted" on the purported loan on January 3, 1991, the nonrecourse note's due date. On that same day, Mr. Fogelman signed a waiver and consent in lieu of foreclosure in which Mr. Fogelman agreed to the Royals retaining his Royals stock and option. The parties also agreed that the fair market value of the collateral on January 3, 1991 was substantially below the face amount of the purported loan and that the Royals could not collect any deficiency from Mr. Fogelman because the note he signed was nonrecourse. Asserting that the collateral it received on January 3, 1991 had no value, the Royals deducted the full amount of the alleged loan ($34,000,000), plus interest ($2,023,001), as a bad debt deduction pursuant to I.R.C. § 166 in 1991. The Royals, as an S corporation, passed the bad debt loss through to Mr. Kauffman, who utilized the loss on his 1991 joint tax return with Mrs. Kauffman.

From early 1992 until May, 1995, the Internal Revenue Service (IRS) audited the Kauffman's federal income tax returns for the tax years 1989, 1990, and 1991. During the course of an audit into the Kauffman's 1991 bad debt deduction, a revenue agent determined that the substance of the 1990 Fogelman transaction was that of a redemption of Mr. Fogelman's Royals stock, not a loan. On July 18, 1995, the IRS issued a notice of deficiency to plaintiffs for the 1991 tax year, reflecting the disallowance of the bad debt deduction. Plaintiffs paid the deficiency on August 18, 1995. Thereafter, on January 17, 1996, plaintiffs submitted a refund claim challenging the disallowance of the bad debt deduction and asserting as the sole ground for refund I.R.C. § 166's allowance for a deduction for any debt which becomes worthless. On June 19, 1996, plaintiffs sent a letter to the IRS asserting their alternative position that they were entitled to a deduction as a trade or business expense under I.R.C. § 162. The IRS determined that plaintiffs' refund claim was not allowed on either ground. Thereafter, plaintiffs filed their original complaint in this matter, again asserting a bad debt deduction or, alternatively, an ordinary and necessary business expense as the ground for refund.

During the course of litigation, on March 13, 1998, plaintiffs submitted to the IRS six amended tax returns for the Royals and corresponding returns for the Kauffmans, relating to tax years 1990 and 1991. Only one of the claims listed a ground for refund in the event that the court might find that the Royals redeemed Mr. Fogelman's stock, rather than provided him with a loan. This claim asserted that the Royals are "entitled to a refund of taxes based on certain recognized interest. Previously recognized interest income from 7/31/90 to 12/31/90 ($2,023,001) is removed from [the Royals'] 1990 income, with the corresponding 1990 flow-through removal of interest income ($1,011,501) to the Kauffmans as 50% shareholders." On November 2, 1998, plaintiffs filed an amended complaint incorporating this alternative claim. Plaintiffs, however, asserted no claim for refund based on the specific ground that, should the court find the Fogelman transaction a redemption of Royals stock, losses attributed to Mr. Fogelman from July 31, 1990 until December 31, 1990 should be reallocated to Mr. Kauffman as the owner of the stock. Plaintiffs did not make specific reference to reallocation of losses from Mr. Fogelman to Mr. Kauffman until the Final Pretrial Order, which the court approved on April 2, 1999.

On June 10, 1999, the court issued a Memorandum and Order which determined that the purported loan to Mr. Fogelman was actually a sale or redemption of Mr. Fogelman's Royals stock (Doc. 132). The court ordered the parties to notify the court of any issues that remained in the case by June 17, 1999. Prior to June 17, 1999, defense counsel informed counsel for plaintiffs that defendant would not assert the statute of limitations as a bar to a refund claim by plaintiffs arising from the court's determination that the Fogelman transaction was a sale or redemption. In a June 17, 1999 status conference with the court, plaintiffs' counsel informed the court that, as a result of the court's order, the Royals should not have treated Mr. Fogelman as a shareholder after July 31, 1990. Therefore, the Royals should have allocated to Mr. Kauffman net operating losses which instead it had passed through to Mr. Fogelman. Additionally, plaintiffs' counsel claimed that the Royals should not have recognized interest income on the "loan," and thus the Royals had a greater operating loss that it should have passed through to Mr. Kauffman. Plaintiffs' counsel stated that he and counsel for defendant had agreed that, as a result of the court's characterization of the transaction as a sale, plaintiffs were entitled to a refund of overpaid taxes. Plaintiffs' counsel further informed the court that plaintiffs' accountants were calculating the amount of refunds owed for defendant's review. Counsel for defendant told the court that defendant agreed that plaintiffs were owed a refund and that defendant would need approximately one month to review plaintiffs' accountants' calculations of the amount of refund owed. The issue of the statute of limitations did not arise in the status conference.

Following the status conference, plaintiffs sent to defendant amended tax returns for the years 1990 and 1991, prepared by plaintiffs' accountants. Plaintiffs' counsel called defendant's counsel and told him that an amended return for the 1993 tax year would be forthcoming. Thereafter, defendant's counsel informed plaintiffs' counsel that defendant's initial position was wrong and that defendant would be asserting the statute of limitations. The statute of limitations issue was not asserted by defendant in the Final Pretrial Order of this case. As a result of defendant's change in position, plaintiffs filed the summary judgment motion currently before the court, asking the court to find that plaintiffs are entitled to a tax refund based on the court's determination that the July 31, 1990 transaction was a sale or redemption of Mr. Fogelman's Royals stock.

II. Summary Judgment Standards

Summary judgment is appropriate if the moving party demonstrates that there is "no genuine issue as to any material fact" and that it is "entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A fact is "material" if, under the applicable substantive law, it is "essential to the proper disposition of the claim." Adler v. WalMart Stores, Inc., 144 F.3d 664, 670 (10th Cir.1998) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). An issue of fact is "genuine" if "there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way." Id. (citing Anderson, 477 U.S. at 248, 106 S.Ct. 2505). Summary judgment is not a "disfavored...