Allen v. United States, Case No. 16-C-1412
| Decision Date | 03 August 2018 |
| Docket Number | Case No. 16-C-1412 |
| Parties | Russell G. ALLEN, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Eastern District of Wisconsin |
George Burnett, Joshua M. Koch, Law Firm of Conway Olejniczak & Jerry SC, Green Bay, WI, for Plaintiff.
Gretchen E. Nygaard, United States Department of Justice, Tax Division, Washington, DC, for Defendant.
DECISION AND ORDER GRANTING SUMMARY JUDGMENT
During 2005, Plaintiff Russell Allen received a jury award of damages, plus interest, in a lawsuit against a utility company after stray voltage on his property harmed his cattle business and dairy farm conducted thereon. Allen initiated this action against the United States of America to recover federal income taxes and a penalty that he paid after the Internal Revenue Service (IRS) determined that he failed to report a significant portion of the jury award as income on his 2005 federal income tax return. The court has jurisdiction pursuant to 28 U.S.C. § 1346 and 26 U.S.C. § 7422. This matter comes before the court on the United States' motion for summary judgment. ECF No. 24. At issue is whether a portion of the jury's damages award should be taxed as ordinary income, whether the interest award on the damages should be taxed as ordinary income, and whether the IRS properly assessed an accuracy penalty against Allen for failing to report a portion of the settlement proceeds on his 2005 return. For the reasons set forth below, the United States' motion for summary judgment will be granted and the case dismissed.
There are no disputes of material fact between the parties. In 2000, Allen filed a lawsuit in the Brown County Circuit Court against Wisconsin Public Service (WPS), a utility company, seeking compensation for damages caused by stray voltage on his dairy farm. Joint Stipulation of Fact (JSF) ¶ 1, ECF No. 22. His complaint described the following alleged damages:
[Allen] has experienced decreased milk production, injury and damage to his dairy herd, has suffered property damage, real and personal, has lost value in the use and enjoyment of his property, has lost profits and income, has incurred veterinary and other expense, and has been otherwise damaged and injured.
Id. ¶ 2. The complaint also alleged that the stray voltage constituted a nuisance that had caused damages. Id. ¶ 3.
Twenty-three witnesses eventually testified at an eighteen-day trial. Id. ¶ 4. Prior to the trial, Allen represented at a hearing that his suit was not a claim for personal injury, and the parties agreed to exclude any medical evidence. Id. ¶ 5. At the trial, there was no evidence presented regarding specific medical expenses incurred by Allen for personal injuries, the details of any injuries suffered by Allen or other farm workers, the value of Allen's real property (the dairy farm), the property's devaluation over time, or Allen's basis in the property. Id. ¶¶ 6, 8-9. Neither a real property appraiser nor an accountant testified during the trial. Id. ¶¶ 7, 10.
Allen's expert witness, Dr. Michael Behr, testified about the economic damages suffered by Allen between 1976 and 2000 as a result of stray voltage. Id. ¶ 11. Based on Allen's operations data, industry information about farm profitability absent stray voltage, and nationwide farm budgeting information, Dr. Behr calculated damages resulting from milk loss (the loss of profits due to reduced milk production), young stock loss (the loss of young dairy cow sales due to the herd not growing as it should have), and cull cow loss (the loss of cows to sell for beef), all as mitigated by cost savings from farm costs not expended because of the smaller herd size. Id. ¶¶ 12-13. Dr. Behr therefore testified that Allen suffered $11,000,000 in economic damages, a number that he adjusted to $13,870,967 to account for inflation. Id. ¶ 14.
During closing arguments, Allen's lawyers asked the jury to award more than $13,000,000 in economic damages to account for the loss of cows and profits over time. Id. ¶ 15. The parties refer to damages awarded for this purpose as the Economic Damages. Id. Also during closing arguments, Allen's lawyers asked the jury to award an unspecified amount of compensatory damages for annoyance, inconvenience, and the loss of use and enjoyment of Allen's property. Id. ¶ 16. The parties refer to damages awarded for this purpose as the Tort Damages. Id. Although Allen had not presented any expert testimony regarding the amount of Tort Damages that he sought, Allen's lawyers advised the jury to base the amount of any Tort Damages award on the $13,000,000 economic damages calculated by Dr. Behr. Id. ¶ 17-18.
Ultimately, the jury returned a special verdict awarding Allen $1,750,000, allocating $750,000 to Economic Damages and $1,000,000 to Tort Damages. Id. ¶¶ 19-20; see also ECF No. 22-3 at 3. After the award was affirmed on appeal, Allen received a $2,269,233.35 payment from WPS during tax year 2005 consisting of the $750,000 Economic Damages award, the $1,000,000 Tort Damages award, and $519,233.35 in interest that had accrued while the appeal was pending. JSF ¶¶ 21-23. Upon receiving the funds in 2005, Allen paid attorneys from two different firms a total of $1,230,384.38 in unpaid fees, costs, and expenses incurred while representing him in his suit against WPS. Id. ¶¶ 26-27. In a letter, one of his attorneys advised him to seek the advice of a tax preparer or other suitably qualified person because the jury award proceeds from WPS were "probably taxable." Id. ¶ 28.
Allen prepared and signed his 2005 federal income tax return on February 27, 2006. Id. ¶ 29. Although he consulted with his accountant regarding the content of the 2005 return, his accountant ultimately refused to sign and submit the return because he was not comfortable with its contents and disagreed with Allen's proposed reporting of the proceeds from the jury award. Id. ¶ 30. On the 2005 return, Allen reported the $750,000 Economic Damages as ordinary income on Schedule F and the $519,233.35 interest on the damages award as capital gains income on Schedule B. Id. ¶ 34. He also reported $548,736 in legal expenses as farm business expenses on Schedule F, although that number did not include all legal expenses he paid during tax year 2005. Id. ¶¶ 34, 37. Allen did not, however, report the $1,000,000 in Tort Damages, nor did he include any disclosure statement explaining his position on the taxability of the $1,000,000 in Tort Damages. Id. ¶ 36. Based on these and other reported income and expenses, Allen reported that for 2005 he owed $124,827 in taxes, which he paid. Id. ¶ 38.
In 2008, the IRS conducted an audit of Allen's 2005 tax return. Id. ¶ 39. Allen participated in the audit, which culminated in a December 23, 2008 final report. Id. ¶¶ 40-41. The audit report treated the $750,000 Economic Damages, $1,000,000 Tort Damages, and $519,233.35 interest award as ordinary income under Schedule F, and it also included all $1,230,384.38 in legal expenses as farm business expenses under Schedule F. Id. ¶ 42. The IRS also assessed an accuracy penalty against Allen under 26 U.S.C. §§ 6662 and 6662A for underreporting his income by $1,000,000 on his original 2005 return. JSF ¶ 44. Taken together, the IRS therefore determined that Allen owed $145,836.89 in tax liabilities, interest, and penalties for 2005 in addition to the tax liability he had paid originally. Id. ¶¶ 45-46.
After paying the additional liabilities, Allen filed a claim for a refund with the IRS in the form of an amended 2005 return asserting that he overpaid his liabilities by $130,215. Id. ¶¶ 47-49. The amended 2005 return claimed $119,408.00 of legal expenses from one of two law firms as an itemized deduction on Schedule A, categorized the $519,233.35 interest award as capital gains income under schedule B, and claimed the $1,000,000 Tort Damages as nontaxable recovery of capital under Schedule B Form 4797. Id. ¶ 50. Allen did not include the $750,000 Economic Damages on the amended 2005 return, but he and the United States agree that he properly reported that amount as ordinary income on his original 2005 return. Id. ¶¶ 50, 57. The IRS ultimately disallowed the refund claim. Id. ¶ 52. Allen subsequently filed this action seeking a refund.
Summary judgment should be granted when the moving party shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). In other words, the time and expense of the parties and the court should not be wasted on a trial when there are no material facts in dispute, one party is entitled to judgment on those facts, and thus there is nothing to try. In deciding a motion for summary judgment, all reasonable inferences are construed in favor of the nonmoving party. Foley v. City of Lafayette , 359 F.3d 925, 928 (7th Cir. 2004). The party opposing the motion for summary judgment must "submit evidentiary materials that set forth specific facts showing that there is a genuine issue for trial." Siegel v. Shell Oil Co. , 612 F.3d 932, 937 (7th Cir. 2010) (). "The nonmoving party must do more than simply show that there is some metaphysical doubt as to the material facts." Id. A court may properly enter summary judgment against a party "who fails to make a showing sufficient to establish the existence of an element essential to the party's case, and on which that party will bear the burden of proof at trial." Parent v. Home Depot U.S.A., Inc. , 694 F.3d 919, 922 (7th Cir. 2012) (internal quotation marks omitted) (quoting Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ).
An assessment by the IRS constitutes a "determination that a taxpayer owes the Federal Government a certain amount of unpaid taxes," and such an assessment...
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