788 F.3d 1280 (11th Cir. 2015), 14-10742, Batchelor-Robjohns v. United States

Docket Nº:14-10742
Citation:788 F.3d 1280
Opinion Judge:RODGERS, District Judge:
Party Name:ANNE (SANDY) BATCHELOR-ROBJOHNS, et al., Plaintiffs-Appellees, Cross-Appellants, v. UNITED STATES OF AMERICA, Defendant-Appellant, Cross-Appellee
Attorney:For Anne (Sandy) Batchelor-Robjohns, Daniel Ferraresi, Patrick O'Neill, Plaintiffs - Appellees-Cross Appellants: Richard Harvey Critchlow, Ryan C. Zagare, Deborah S. Corbishley, Kenny Nachwalter, PA, Miami, FL. For United States of America, Defendant - Appellant-Cross Appellee: Ellen Page DelSole...
Judge Panel:Before MARTIN and DUBINA, Circuit Judges, and RODGERS,[*] District Judge.
Case Date:June 05, 2015
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit
SUMMARY

This is an appeal of a federal income tax refund suit filed by the Estate of George Batchelor (“Estate”). Counts I and II of the Estate’s three-count complaint involve Batchelor’s personal income taxes for 1999 and 2000. Count III concerns the Estate’s attempt to claim a credit for its 2005 income taxes for payments it made in settlement of various lawsuits against Batchelor. The court concluded... (see full summary)

 
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788 F.3d 1280 (11th Cir. 2015)

25 Fla.L.Weekly Fed. C 1233

ANNE (SANDY) BATCHELOR-ROBJOHNS, et al., Plaintiffs-Appellees, Cross-Appellants,

v.

UNITED STATES OF AMERICA, Defendant-Appellant, Cross-Appellee

No. 14-10742

United States Court of Appeals, Eleventh Circuit

June 5, 2015

Appeals from the United States District Court for the Southern District of Florida. D.C. Docket No. 1:12-cv-20038-FAM.

For Anne (Sandy) Batchelor-Robjohns, Daniel Ferraresi, Patrick O'Neill, Plaintiffs - Appellees-Cross Appellants: Richard Harvey Critchlow, Ryan C. Zagare, Deborah S. Corbishley, Kenny Nachwalter, PA, Miami, FL.

For United States of America, Defendant - Appellant-Cross Appellee: Ellen Page DelSole, Richard Farber, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; Wifredo A. Ferrer, Kathleen Mary Salyer, U.S. Attorney's Office, Miami, FL; Kathryn Keneally, Alexander J. Merton, Philip M. Schreiber, U.S. Department of Justice, Tax Division, Washington, DC.

Before MARTIN and DUBINA, Circuit Judges, and RODGERS,[*] District Judge.

OPINION

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RODGERS, District Judge:

This is an appeal of a federal income tax refund suit filed by the Estate of George Batchelor (" Estate" ).1 Counts I and II of

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the Estate's three-count Complaint involve Batchelor's personal income taxes for 1999 and 2000. Count III concerns the Estate's attempt to claim a credit for its 2005 income taxes for payments it made in settlement of various lawsuits against Batchelor. The district court entered judgment in favor of the Estate on Counts I and II and in the government's favor on Count III. The Estate appeals the district court's judgment as to Count III, which we affirm, and the government appeals as to Counts I and II, which we reverse.

I. Background

George Batchelor passed away in July 2002. Prior to his death, he owned all of the stock in International Air Leases, Inc. (" IAL" ), an aviation business which bought, sold, repaired, serviced, and leased aircraft and aircraft parts. On February 10, 1999, Batchelor sold his IAL stock to International Air Leases of Puerto Rico, Inc. (" IALPR" ), for approximately $502 million.2 As part of the transaction, IALPR gave Batchelor a promissory note for $150 million (" Note" ), which was secured by IAL assets that had been transferred in the sale, such as aircraft planes and engines (" Option Assets" ). Batchelor retained an option to buy back the Option Assets, and the parties agreed that if Batchelor exercised the option, they would reduce the balance of the $150 million Note by a certain negotiated price for each asset. On April 1, 1999, Batchelor exercised his option and purchased the Option Assets for approximately $92.5 million, which reduced the balance on the Note by that amount. IALPR paid off the Note in August 2000.3 As a result of the transaction, Batchelor received capital gains and interest income, and IAL realized a capital gain through its sale of the Option Assets. On his 1999 personal income tax return, Batchelor declared the income he received from the sale in 1999, approximately $483 million, as capital gain, and paid capital gains tax on the proceeds.4 On his 2000 personal income tax return, Batchelor declared $18.8 million of the sale proceeds as capital gain, and an additional $5.8 million as interest income on the Note.

In February 2002, IAL was placed into involuntary bankruptcy. The IRS determined that IAL was liable for approximately $100 million in unpaid taxes, largely as a result of its attempt to use a tax shelter scheme after the stock sale, and issued a notice of deficiency for that amount. Although there was never any suggestion that Batchelor was involved in the scheme, the government nevertheless sought to collect IAL's corporate income tax obligation directly from Batchelor under a transferee liability theory.5 This suit is referred to as " Batchelor I."

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In Batchelor I, the government attempted to prove that the sale of the IAL stock rendered IAL insolvent because the transferring parties undervalued the Option Assets by approximately $23.5 million, such that Batchelor received excess consideration relative to the actual fair market value of the IAL stock. The government sought to establish the relative values of the IAL stock and Option Assets through expert testimony. The district court, however, struck the experts based on the government's failure to comply with the expert disclosure requirements under the civil rules of procedure, and granted summary judgment in the Estate's favor. Consequently, the value of the Option Assets was not decided in Batchelor I.

In December 2004, the government sued the Estate based on its determination that Batchelor had underreported his capital gains in conjunction with the IAL sale on his 1999 and 2000 personal income tax returns. This suit is referred to as " Batchelor III." In that suit, the government argued, as it did in Batchelor I, that Batchelor had undervalued the Option Assets by $23.5 million, resulting in a tax deficiency of approximately $6.7 million. The Estate subsequently paid the tax, and the government then dismissed the case without prejudice while acknowledging the Estate's right to sue for a refund.6 Thereafter, the IRS denied the Estate's refund claim, and the Estate filed the instant suit seeking a refund of these tax payments in Counts I and II.

Count III of the Estate's Complaint concerns settlement payments the Estate made in connection with four civil lawsuits. In 2002, both IAL and IALPR sued the Estate, seeking to set aside the sale of Batchelor's stock as a fraudulent transfer. In addition, the Estate inherited two suits commenced prior to that sale, each stemming from Batchelor's involvement with Rich International Airways (" Rich" ). The Estate eventually settled all four lawsuits, and made settlement payments totaling $41 million in July 2004.7 The Estate subsequently filed its Federal Estate Tax Return and deducted the settlement payments from Batchelor's gross estate as claims against the Estate pursuant to 26 U.S.C. § 2053(a)(3). The Estate later sought a refund of $8.3 million on its 2005 income tax return for those payments pursuant to 26 U.S.C. § 1341, which the IRS denied and the Estate now seeks to recover in Count III.

During the district court proceedings, the Estate filed a motion for summary judgment with respect to Count I on the basis of res judicata, arguing that both Batchelor I and its refund claim in Count I of this case involve the same cause of action. The government filed a cross-motion for summary judgment on Count III, arguing that the Estate should be precluded from taking both an income tax deduction and an estate tax deduction for the settlement payments. The district court granted both motions. With respect to the Estate's motion on Count I, the court found that res judicata barred the government's claim because the instant case and Batchelor I " arise out of the very same transaction" and because in both cases the government sought to establish that the value of the Option Assets transferred to Batchelor in 1999 had a higher value than

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Batchelor had reported. Regarding the government's motion on Count III, the court determined that because the Estate deducted the settlement payments from Batchelor's gross estate to reduce its estate tax obligations, the Estate could not also use those payments to reduce Batchelor's personal income tax liability. The case then proceeded to trial on Count II, which, like Count I, concerned the effect of the IAL stock sale on Batchelor's personal income taxes. As with Count I, the district court determined that Count II arose from the sale of the Option Assets at issue in Batchelor I, and that res judicata precluded the government from contesting the Estate's refund claim.8 These cross-appeals followed.

II. Standards of Review

The district court's application of res judicata presents a question of law which we review de novo. In re Piper Aircraft Corp., 244 F.3d 1289, 1295 (11th Cir. 2001). Likewise, the district court's interpretation of a statute -- here, various provisions of the Tax Code -- is also a question of law we review de novo. Comm'r v. Neal, 557 F.3d 1262, 1269 (11th Cir. 2009).

III. Analysis

First, we address the district court's application of res judicata to Counts I and II. Second, we address the Estate's attempt to claim an income tax deduction for the settlement payments at issue in Count III.

A. Res Judicata

The district court determined that the government was precluded from defending against the Estate's claim that it had accurately reported the value of the Option Assets when calculating Batchelor's 1999 and 2000 income tax obligations. According to the district court, res judicata applies because both this suit and Batchelor I " arise out of the very same transaction" and " the government here is attempting to establish the exact same thing it sought to prove in Batchelor I: that the value of the option assets transferred to Batchelor in 1999 had a higher value than Batchelor and IALPR agreed upon." The district court also found that Batchelor's 1999 and 2000 income tax obligations could have been raised and decided in Batchelor I, such that those claims may not be raised here.

The government makes two primary arguments on appeal. First, it argues that res judicata does not apply because the personal income tax claims against Batchelor in this case and the transferee liability claim against IAL in Batchelor I are not the same cause of action. Second, the government argues that, even if the claims are part of the same cause of action, it could not have asserted the instant claims in Batchelor I

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