Chernin v. U.S.

• Decision Date: 10 July 1998
• Docket Number: 97-1972,Nos. 97-1913,s. 97-1913
• Citation: 149 F.3d 805
• Parties: -5134, 98-2 USTC P 50,551 Marshall M. CHERNIN; Ida Raye Chernin, Cross-Appellants/Appellees, v. UNITED STATES of America, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 805

149 F.3d 805

82 A.F.T.R.2d 98-5134, 98-2 USTC P 50,551

Marshall M. CHERNIN; Ida Raye Chernin, Cross-Appellants/Appellees, v. UNITED STATES of America, Appellant/Cross-Appellee.

Nos. 97-1913, 97-1972.

United States Court of Appeals Eighth Circuit.

Submitted March 11, 1998.

Decided July 10, 1998.

Kenneth L. Greene, Department of Justice, Washington, DC, argued (Anthony T. Sheehan, Department of Justice, on the brief), for Appellant/Cross-Appellee.

Frank R. Berman, Minneapolis, MN, argued (John G. Kester, James T. Fuller, III, Susan L. Abbott, Margaret A. Keeley, Washington, DC, on the brief), for Cross-Appellants/Appellees.

Before WOLLMAN and HANSEN, Circuit Judges, and GOLDBERG, ¹ District Judge.

GOLDBERG, District Judge.

This is a tax refund dispute. Marshall M. Chernin ("taxpayer") and Ida Raye Chernin, his wife, filed this action, seeking a refund for taxes levied and collected by the Internal Revenue Service ("IRS") during the years 1979 to 1983. ² Taxpayer asserts that refunds are due for taxes paid on income reported in 1982 on two alternative grounds: either because (1) in 1982, he lost the unrestricted right to funds that he had previously claimed as income; or (2) in 1982 he transferred funds to contest an "asserted liability." The United States counters that taxpayer does not qualify for a refund in the first instance because he never repaid the disputed funds that he had previously claimed as income. In the second instance, the United States maintains that if the taxpayer is entitled to a refund for funds transferred to secure an "asserted liability" that he contested, then (1) the refund should only be allowed for the tax year 1983, not 1982; (2) the deduction should be allowed as a non-trade loss, not as a business loss; and (3) this court does not have jurisdiction to consider whether taxpayer is entitled to a refund for net operating losses carried back from 1982 to 1979. The district court first rejected taxpayer's claim that a refund is due for funds to which taxpayer allegedly lost an unrestricted right to use. However, the district court still granted summary judgment in taxpayer's favor, concluding that a refund is due for funds transferred to contest an "asserted liability." The district court also accepted taxpayer's claim that the deduction is allowable as a business loss and that a refund is due for net operating losses. We affirm in part and reverse and remand in part.

I.

Taxpayer served as the general manager for Long Prairie Packing Company ("LPP"), a Minnesota corporation, from 1978 through 1982. Taxpayer believed that under an oral agreement with LPP he was entitled to annual bonus payments as part of his compensation. The bonus payment amounted to ten percent of LPP's annual pretax profits. Taxpayer distributed bonus payments to himself in accordance with the bonus plan throughout the years 1978 to 1981, and in November of 1982. Between 1978 and 1982, taxpayer's bonus compensation totaled $965,482. Upon receipt of these payments, taxpayer deposited the bonus proceeds in two separate accounts with two banks in Texas. Virtually all of the funds deposited in the Texas banks derived from the bonus compensation taxpayer received from LPP.

In November 1982, allegedly upon finding that taxpayer was appropriating funds to himself in a manner unauthorized by any agreement oral or otherwise, LPP terminated taxpayer's employment. To prevent taxpayer from disposing of the now contested bonus payments, LPP initiated several civil actions in state courts. In particular, LPP filed suit in Minnesota state court in 1982, claiming taxpayer misappropriated and embezzled funds from the company; taxpayer counterclaimed in this suit, alleging breach of contract. Simultaneously, LPP initiated a suit in Dallas County, Texas state court. In this later action, LPP moved the court to issue temporary restraining orders ("TROs"), prohibiting withdrawal of funds from the Texas bank accounts. The Texas state court granted LPP's motion and issued ten day TROs, which were extended on November 15, 1982 until the conclusion of a hearing on a preliminary injunction requested by LPP. The Texas banks filed counterclaims in interpleader against both LPP and taxpayer on November 22, 1982. Shortly thereafter, on December 10, 1982, LPP also successfully persuaded the Texas court to issue a writ of garnishment against taxpayer's accounts. The writ of garnishment specifically named the two Texas banks as garnishees of taxpayer's accounts.

Before the Texas state actions could run their course, however, LPP and taxpayer reached an interim settlement agreement in April 1983 whereby all the Texas state actions were dismissed, and the disputed funds from the Texas bank accounts were transferred to First National Bank in Minneapolis, Minnesota. In accordance with the April 1983 settlement agreement, these funds were placed in an escrow account to be held pending the outcome of the Minnesota state embezzlement litigation initiated by LPP. The funds placed in escrow pursuant to the settlement agreement totaled $1,066,570. A jury ultimately vindicated taxpayer in December 1990, finding that he properly distributed bonus payments to himself during the years 1978 to 1982 and that LPP breached its employment contract with taxpayer. Following the jury trial, LPP and taxpayer entered a settlement agreement whereby the funds in escrow, then totaling nearly $1.8 million, were released to taxpayer and damages in the amount of $6.5 million were awarded to taxpayer.

After prevailing in the embezzlement litigation, taxpayer paid in full his income tax for the years 1980 to 1983. Soon thereafter, in August 1991, taxpayer timely filed a Form 1040X amended return for 1982 with the IRS, seeking a $642,768 refund. ³ Taxpayer based his claim for refund on 26 U.S.C. § 1341, arguing that the TROs and the writ of garnishment inhibited his unrestricted right to the disputed funds in the Texas accounts. In his Form 1040X refund claim, taxpayer made clear that the amended return included a claim for deductions in prior years, specifically 1978 to 1981. In addition, taxpayer timely filed an amended return in October 1992 for the tax year 1983, seeking a refund of $560,145. Taxpayer also based this claim on section 1341; he also noted that the claim included amended deductions for the years 1978 to 1982. At a conference held in November 1992 between taxpayer and the IRS, the applicability of 26 U.S.C. § 461(f) as the basis for a refund in either 1982 or 1983 was discussed as well as the applicability of section 1341. On November 17, 1992, the IRS concluded that under either section 461(f) or section 1341, taxpayer failed to qualify for a refund of taxes paid for the year 1982 or 1983. ⁴

Taxpayer challenged this ruling by filing suit in the district court in October 1994. The court below issued an opinion on August 6, 1996 on cross-motions for summary judgment. The court first ruled that taxpayer is not entitled to a refund under section 1341 because he never actually repaid LPP the funds from the Texas accounts. The court concluded that an actual restoration of funds to an obligee must occur before a taxpayer may obtain relief under section 1341. According to the court, neither the TROs or garnishment proceedings in Texas nor the transfer of funds to the escrow account in Minnesota operated to restore the disputed funds to LPP, the alleged obligee, and, hence, relief under section 1341 was not available to the taxpayer. The court then held, however, that taxpayer is entitled to a refund under section 461(f). The court noted that taxpayer meets all four statutory requirements for relief delineated in section 461(f), including the transfer requirement. Specifically, the court ruled that a transfer occurred when the parties agreed to place the disputed funds in an escrow account in April 1983. The court also rejected the United States' alternative argument that, assuming section 461(f) applies, the deduction allowable is as a loss incurred in a transaction entered into for profit, though not connected with a trade or business, under 26 U.S.C. § 165(c)(2), not as a trade or business loss under 26 U.S.C. § 165(c)(1).

In its opinion, the district court did not set the amount of refund due taxpayer. Instead, the court encouraged the parties to reach agreement as to the proper amount of the refund. Unable to reach a settlement, however, the parties submitted to the court their respective claims for the proper refund amount. The United States used the tax year 1983 as the basis for its refund calculation, concluding that the transfer giving rise to the deduction allowable under section 461(f) occurred by way of the escrow account in April 1983. Taxpayer based his refund calculation on the tax year 1982, concluding that the TROs and the writ of garnishment issued in 1982 amounted to a transfer within the meaning of section 461(f). Taxpayer also included in his claim a refund for net operating losses carried back from 1982 to 1979. Without further opinion, on January 29, 1997, the court entered summary judgment in favor of taxpayer for $1,536,768, an amount consistent with taxpayer's claim for refund. The United States appeals and taxpayer cross appeals from this decision.

II.

We review the district court's grant of summary judgment de novo. See, e.g., Bremen Bank & Trust Co. v. United States, 131 F.3d 1259, 1263 (8th Cir.1997). Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Because the parties have stipulated to the relevant facts, the questions on appeal solely concern whether the district court's judgment should be affirmed as a matter of law.

A. The Record Demonstrates that a Transfer Within the Meaning of Section 461(f) Occurred in 1982.

In general, an accrual basis taxpayer may not deduct an expense until (1) all...