Brown v. U.S.

• Decision Date: 08 October 1992
• Docket Number: 90-1795,Nos. 90-1539,s. 90-1539
• Citation: 976 F.2d 1104
• Parties: -5819, 92-2 USTC P 50,564, 24 Fed.R.Serv.3d 800 Claude P. BROWN and Grace W. Brown, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1104

976 F.2d 1104

70 A.F.T.R.2d 92-5819, 92-2 USTC P 50,564,

24 Fed.R.Serv.3d 800

Claude P. BROWN and Grace W. Brown, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

Nos. 90-1539, 90-1795.

United States Court of Appeals Seventh Circuit.

Argued May 18, 1992.

Decided Oct. 8, 1992.

Robert I. White (argued), Carla P. Dykes, Lawrence Sherlock, Shelley Cashion, Chamberlain, Hrdlicka, White, Johnson & Williams, Houston, Tex., for plaintiffs-appellants.

Gary R. Allen, David E. Carmack, Steven W. Parks, Edward T. Perelmuter (argued), Dept. of Justice, Tax Div., Appellate Section, Seth G. Heald, Dept. of Justice, Tax Div., Washington, D.C., for defendant-appellee.

Before CUDAHY and MANION, Circuit Judges, and GIBSON, Senior Circuit Judge. ^*

CUDAHY, Circuit Judge.

The district court granted summary judgment in favor of the government on Claude P. Brown's tax refund claim, concluding that Brown had failed to adduce sufficient evidence of bona fide losses during the year in question, 1984. We reverse and remand.

I.

In October 1981 Claude P. Brown ¹ opened a trading account with the Houston, Texas office of ContiCommodity Services, Inc. (Conti). In 1982 Brown opened other accounts that were owned jointly by Brown and his business associate, Isaac C. Hemmings. David Ragan, who managed Conti's Houston office, performed the trading of government securities and commodity futures in Brown's accounts.

In May 1984 the Houston office of Conti was closed. Conti then claimed that there were deficit equity balances in Brown's and other customers' accounts. Eventually Conti filed a multi-count complaint against Brown and several other customers, seeking to recover the alleged deficit equity balances. Several of the customers, in turn, including Brown, contended that Conti and Ragan had acted improperly in conducting trading for the customers. Brown and the other customers filed a counterclaim against Conti alleging, among other things, that many of the trades giving rise to the alleged deficit balances were misallocated, prearranged or fictitious. The litigation between Brown and Conti, as well as several other cases stemming from activities at Conti's Houston office, were consolidated for purposes of discovery in a multidistrict proceeding pursuant to 28 U.S.C. § 1407. That proceeding, MDL 644, was before Judge Hart in the Northern District of Illinois. In re ContiCommodity Servs., Inc., Sec. Litig., 733 F.Supp. 1555 (N.D.Ill.1990).

Meanwhile, the Internal Revenue Service had begun investigating the trading performed at Conti's Houston office. By 1985 the IRS had determined that this trading was a sham and lacked economic substance. Certain deductions claimed by Brown on his 1981 and 1982 tax returns in connection with his Conti accounts were consequently disallowed. The IRS proposed deficiencies against Brown of $9,956,314 for 1981 and $3,282,906 for 1982 based in large part on the disallowance of the deductions associated with Brown's Conti accounts. Brown challenged these deficiencies by filing a petition in the United States Tax Court.

Brown's Tax Court cases, along with other cases involving the Conti trading, were assigned to Tax Court Judge Moxley Featherston. In December 1986 Judge Featherston approved a procedure for joining the government in MDL 644, the pending multidistrict litigation, so that issues involving the Conti trading could be resolved in a single forum. As part of that procedure, Brown filed a claim for refund for the year 1984 based on deductions for losses and expenses from the Conti trading that had not been claimed on his original 1984 return. Brown claimed that he had suffered a loss of at least $1,699,550 in the Conti trading, and therefore claimed a refund of $263,966 for 1984. ² When the claim was promptly disallowed by the IRS, Brown brought an action for refund of taxes in the United States District Court for the Southern District of Florida. Shortly thereafter, the Judicial Panel on Multidistrict Litigation transferred the case to the Northern District of Illinois, where it was consolidated with MDL 644.

Brown's position in the tax refund case was directly opposed to his position in the Conti litigation. To prevail on his tax claim, Brown would ultimately need to establish that he had suffered bona fide economic losses in 1984 as a result of the trading at Conti. In his dispute with Conti, however, Brown's position was that the trades performed for his account by Conti (or at least a significant portion of them) were shams with no economic substance. Indeed, in response to a directive from the district court during discovery to identify contested trades, Brown took the position that all of the trades at Conti should be disregarded as "bad" trades. The government attempted to use Brown's position in the Conti dispute as a binding admission in the tax refund case, and moved for summary judgment in the refund suit. Brown responded by arguing that his refund claim against the government was presented as an alternative theory. In the event that he lost in the Conti case, Brown argued, he would be deemed to have suffered bona fide economic losses, and would be entitled to a tax refund for those losses.

In a Memorandum Opinion and Order dated January 11, 1990, Judge Hart resolved several motions for summary judgment and motions to dismiss in the Conti litigation, including the government's motion. The district judge granted summary judgment in favor of the government in Brown's and other taxpayers' refund suits, concluding that the taxpayers had presented insufficient evidence of legitimate losses or deductions for the years in question. ContiCommodity Sec. Litig., 733 F.Supp. at 1574. Brown appeals the district court's grant of summary judgment.

II.

We begin by addressing our jurisdiction in this case, an issue that the parties have briefed separately in response to an order of this Court. Pursuant to 28 U.S.C. § 1291, we are authorized to hear appeals from "final decisions" of the district courts. Ordinarily a judgment disposing of fewer than all of the claims or parties in a case is not an appealable final decision absent an express determination pursuant to Federal Rule of Civil Procedure 54(b). Is such a determination required when two or more cases have been consolidated, or do the cases retain their separate identities so that a final decision in one is immediately appealable?

Fortunately, our cases provide answers. Where cases have been consolidated for all purposes, they become a single judicial unit for purposes of Rule 54(b), and accordingly a judgment that does not dispose of all claims of all parties is not appealable unless the district court makes the findings required by Rule 54(b). Sandwiches, Inc. v. Wendy's Int'l, Inc., 822 F.2d 707, 709 (7th Cir.1987). On the other hand, where it is clear that cases have been consolidated for only limited purposes, a decision disposing of all the claims in only one of the cases is a final decision subject to immediate appeal. Ivanov-McPhee v. Washington Nat'l Ins. Co., 719 F.2d 927, 930 & n. 2 (7th Cir.1983). Things get more complicated in the gray area between these two scenarios--where the extent of consolidation is unclear. In that situation, present in both Sandwiches, Inc. and Ivanov-McPhee, we have treated the cases as fully consolidated and declined to exercise jurisdiction, provided the cases involve closely related issues and could have been brought as a single action. Sandwiches, Inc., 822 F.2d at 709; Ivanov-McPhee, 719 F.2d at 930.

The case at hand does not fall in the gray area, because the extent of consolidation is clear. Under the order of the Judicial Panel on Multidistrict Litigation as well as 28 U.S.C. § 1407, the transfer of the numerous cases in MDL 644 was "for coordinated or consolidated pretrial proceedings." Since the consolidation was for pretrial proceedings only, the tax refund case retains its separate identity. While the district court did not dispose of all the claims in MDL 644, it did render a final judgment in Brown's tax case, and that judgment is appealable notwithstanding the lack of a Rule 54(b) determination. We therefore have jurisdiction.

III.

Our review of a decision granting summary judgment is de novo, and we draw all reasonable inferences in favor of the nonmoving party. Martin v. Consultants & Adm'rs, Inc., 966 F.2d 1078, 1084 (7th Cir.1992). Summary judgment is appropriate only if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Id.; Fed.R.Civ.P. 56(c).

In moving for summary judgment, the government argued below that Brown's position in the Conti case--that all of the 1984 Conti trades should be disregarded as shams or as otherwise illegitimate--was a binding admission that undermined his position in the tax refund case. The government is correct that the positions are inconsistent: under § 165 of the Internal Revenue Code, only bona fide losses are allowed as a deduction. 26 U.S.C. § 165; 26 C.F.R. § 1.165-1(b); Scully v. United States, 840 F.2d 478, 485 (7th Cir.1988). A loss that stems from a transaction devoid of economic substance is not a bona fide loss. See Yosha v. Commissioner, 861 F.2d 494, 497 (7th Cir.1988); Kirchman v. Commissioner, 862 F.2d 1486, 1491 (11th Cir.1989). It follows that if Brown is proven correct in his claims in the Conti litigation, he is not entitled to the deduction that he seeks in his suit against the government. But it is a different question whether Brown may pursue such inconsistent claims.

On appeal, the government no longer seriously argues that Brown is strictly bound in this case by his position in the Conti case, and we believe that the government's shift in emphasis is well-advised. Brown argued in the district court and argues here that his tax claim is simply an alternative claim, and we see no obstacle to Brown's approach. Rules 8(e)(2) and ...