Adkins v. United States
| Decision Date | 29 June 2021 |
| Docket Number | No. 10-851T,10-851T |
| Parties | CHARLES P. ADKINS and JANE E. ADKINS, Plaintiffs, v. THE UNITED STATES, Defendant. |
| Court | U.S. Claims Court |
RCFC 11 Sanctions; Attorney's Fees Under 26 U.S.C. § 7430; Substantial Justification; Appropriate Hourly Rates and Time Expended; Adequacy of Supporting Documentation
John F. Rodgers, Alexandria, VA, for plaintiffs.
Steven E. Chasin, United States Department of Justice, Washington, DC, for defendant.
Plaintiffs Charles P. and Jane E. Adkins were victims of a fraudulent investment scheme, and after extensive proceedings before this court and on appeal, obtained a refund of federal income taxes based on the losses they sustained due to the scheme. Plaintiffs now seek sanctions against the government in the form of attorney's fees or, in the alternative, an award of attorney's fees pursuant to the fee-shifting statute applicable to tax refund suits. As explained below, sanctions are not warranted in this case, but plaintiffs are entitled to statutory attorney's fees. The court therefore grants plaintiffs' motion in part.
Plaintiffs began investing through Donald & Co. Securities, Inc. ("Donald & Co.") in 1999.1 Unbeknownst to plaintiffs, Donald & Co. was operating a "pump-and-dump" scheme. Plaintiffs suffered significant losses from this scheme.
Because attempts to recover their losses from the perpetrators of the fraud were unsuccessful, plaintiffs sought to recoup some of those losses by claiming a federal income tax deduction. Pursuant to section 165 of the Internal Revenue Code ("I.R.C.") and its implementing regulations, taxpayers are permitted to deduct a theft loss from their income in the year that they sustained the loss. Plaintiffs chose to claim the theft loss in 2004, and then carry back portions of the loss to the previous three years. They filed amended federal income tax returns reflecting a total theft loss of $2,118,725, and seeking refunds of $115,736 for 2004, $24,021 for 2003, $71,621 for 2002, and $177,707 for 2001.
On December 12, 2008, the Internal Revenue Service ("IRS") disallowed plaintiffs' refund claims for 2001, 2003, and 2004. Plaintiffs protested the disallowance at the IRS Office of Appeals. In their appeal, plaintiffs claimed a total theft loss of $2,575,958.19. Most of that loss derived from the Donald & Co. pump-and-dump scheme: $2,336,895.58 of the loss was attributable to stock purchases made through Donald & Co. and $194,062.61 of the loss was attributable to stock purchases made through third-party brokers. The remaining $45,000 of the claimed loss related to plaintiffs' investment in a private placement offering.
In an April 5, 2011 "Appeals Case Memorandum," an IRS Appeals Officer, David Kaplon, concluded, pending the final computations of the Tax Computation Specialist, that plaintiffs had sustained a theft loss of $2,532,996.01—plaintiffs' claimed theft loss minus the portion of the loss attributable to certain stock purchases made through third-party brokers—in 2004, and were therefore entitled to the corresponding refunds. Mr. Kaplon described his conclusion as a proposed settlement. However, the proposed settlement was never finalized because the IRS Office of Appeals lost jurisdiction to settle plaintiffs' claim when plaintiffs filed their tax refund suit in this court on December 10, 2010.
After plaintiffs filed suit, the parties engaged in discovery and then cross-moved for summary judgment. Initially, the issues presented by the parties in those motions included whether plaintiffs' investment losses constituted a theft loss pursuant to I.R.C. § 165. Under the then-existing precedent, whether securities fraud constituted a theft was a matter of state law, and although the parties agreed that Virginia law was applicable, they disagreed on the interpretation of that law. However, while the motions were pending, the Honorable Francis M. Allegra issued a decision in Goeller v. United States, 109 Fed. Cl. 534 (2013), in which he determined that the definition of "theft" should be derived from federal common law. This court therefore requested supplemental briefing on the issue, and during that briefing, defendant conceded that most of plaintiffs' investment losses—those attributable to stock purchases made through Donald & Co.—constituted a theft loss. Thus, the issues remaining for the court's resolution were (1) whether the losses attributable to stock purchases through third-party brokers and to a private placement offering constituted theft losses under I.R.C. § 165; (2) whether 2004 was the correct year for the theft loss deduction; and (3) if a refund was proper, the amount of that refund.
In a December 11, 2013 Opinion and Order, the court held that (1) summary judgment for defendant was proper with respect to losses attributable to certain stock purchases through the third-party brokers; (2) summary judgment was not proper for either party with respect to losses attributable to other stock purchases through the third-party brokers or to the private placement offering; and (3) summary judgment was not proper for either party with respect to whether 2004was the correct year for the theft loss deduction. See generally Adkins v. United States, 113 Fed. Cl. 797, 804-06 (2013).
The court held a three-day trial on the outstanding issues in November 2014. During trial, the court received documentary evidence and heard testimony from, among others, plaintiffs and Mr. Kaplon. After the parties submitted posttrial briefs, the court concluded, in a February 16, 2016 Opinion and Order, that plaintiffs were not entitled to a theft loss deduction for the 2004 tax year and dismissed their complaint. See generally Adkins v. United States, 125 Fed. Cl. 304 (2016), vacated, 856 F.3d 914 (Fed. Cir. 2017). Plaintiffs appealed the court's decision to the United States Court of Appeals for the Federal Circuit ("Federal Circuit"). Concluding that this court misconstrued the regulation concerning the timing of a theft loss deduction, the Federal Circuit vacated this court's judgment and remanded the case for further proceedings. See generally Adkins, 856 F.3d at 915-20.
On remand, the parties filed a joint status report indicating that "no further testimony or evidence" was required, and proposing a schedule for supplemental briefing. After reviewing the supplemental briefs, the court encouraged the parties to engage in settlement discussions and, on the agreement of the parties, referred the case to the court's Alternative Dispute Resolution program. On April 4, 2018, the parties advised the court that they were unable to reach a settlement. The court thus provided the parties with a final opportunity to submit briefs in support of their positions. After that briefing concluded, the court again held, in an October 26, 2018 Opinion and Order, that plaintiffs were not entitled to a theft loss deduction for the 2004 tax year. See generally Adkins, 140 Fed. Cl. at 297. Plaintiffs appealed that decision. Ultimately, the Federal Circuit concluded that plaintiffs were, in fact, entitled to a theft loss deduction for the 2004 tax year. See generally Adkins, 960 F.3d at 1353-68. It therefore reversed this court's judgment and remanded the case for a calculation of the tax refund to which plaintiffs were entitled. Id. at 1368.
On this second remand, the parties filed a stipulation reflecting their agreement regarding the amount of the judgment that should be entered for plaintiffs: tax refunds of $115,730 for 2004, $24,021 for 2003, $71,621 for 2002, and $177,707 for 2001, and statutory interest on those amounts computed under chapter 67 of the I.R.C. The court directed that judgment be entered in accordance with the stipulation.
Subsequent to the entry of judgment, plaintiffs filed a motion to amend the judgment to include specified amounts of prejudgment interest. After the motion was fully briefed, the court concluded that plaintiffs had not demonstrated that their requested relief was warranted procedurally or substantively. Ultimately, plaintiffs filed a satisfaction of judgment reflecting that they received the tax refunds and interest to which they were entitled.
Plaintiffs also filed a bill of costs, seeking to recover $8595.34 for fees paid to the clerk, court reporter fees, fees incident to the taking of depositions, witness fees and costs, and costs taxed by the Federal Circuit. Defendant filed an objection, which was followed by a reply and a surreply. Upon reviewing the parties' submissions, the clerk taxed costs in plaintiffs' favor in the amount of $1414.00.
Shortly after filing their motion to amend the judgment and bill of costs, plaintiffs filed the motion now pending before the court: a motion for sanctions under Rule 11 of the Rules of the United States Court of Federal Claims ("RCFC") or, in the alternative, for attorney's fees under I.R.C. § 7430. Defendant opposes the motion. The motion is now fully briefed and, with neither party requesting oral argument, ripe for adjudication.
As they emphasize in their reply, the primary remedy plaintiffs seek is sanctions against defendant pursuant to RCFC 11. However, if the court does not award sanctions, plaintiffs request the alternative remedy of attorney's fees under I.R.C. § 7430. The court turns first to plaintiffs' request for sanctions.
Plaintiffs argue that RCFC 11 sanctions are appropriate because defendant allegedly abandoned the settlement they reached with Mr. Kaplon of the IRS Office of Appeals by actively litigating the case, including purportedly resolved issues, after they filed suit. Defendant, in response, contends that the motion is procedurally defective, but even if it were not, it is frivolous on the merits.
Attorneys are obligated to ensure that their filings are not being presented to the court for an improper purpose, and that the...
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