Culley v. U.S.

• Citation: 222 F.3d 1331
• Parties: (Fed. Cir. 2000) LARRY J. CULLEY, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee. 99-5110 DECIDED:
• Decision Date: 15 August 2000
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

Page 1331

222 F.3d 1331 (Fed. Cir. 2000)

LARRY J. CULLEY, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

United States Court of Appeals for the Federal Circuit

99-5110

DECIDED: August 15, 2000

Appealed from: United States Court of Federal Claims Judge Edward J. Damich

Kevin R. Patmore, Price & Collins, LLP, of Santa Claus, Indiana, argued for plaintiff-appellant. On the brief was David E. Price.

Donald B. Tobin, Attorney, Tax Division, Appellate Section, Department of Justice, of Washington, DC, argued for defendant-appellee. With him in the brief wereLoretta C. Argrett, Assistant Attorney General; and Ann B. Durney, Attorney. Of counsel was Joan I. Oppenheimer, Attorney.

Before NEWMAN, Circuit Judge, SKELTON, Senior Circuit Judge, and PLAGER, Circuit Judge.

PLAGER, Circuit Judge.

Larry J. Culley filed a tax refund suit against the United States ("the Government") in the United States Court of Federal Claims. The Court of Federal Claims granted the Government's motion for summary judgment, finding that Mr. Culley failed to show that he was entitled to the favorable tax treatment provided under I.R.C. § 1341. See Culley v. United States, No. 96-576T (Fed. Cl. Apr. 15, 1999). The Court of Federal Claims also held that Mr. Culley forfeited his claim against the Government pursuant to 28 U.S.C. § 2514. See id.

Because Mr. Culley does not satisfy the requirements of I.R.C. § 1341, we affirm the judgment of the Court of Federal Claims.

BACKGROUND

Mr. Culley was the owner and sole shareholder of Thrust Industries, Inc. ("Thrust") from its incorporation in 1972 until he sold most of the assets and holdings of Thrust to Princeton Pike Park, Inc. ("Princeton") in October 1987. At the time of the sale, Mr. Culley agreed to continue to direct the day to day business affairs of Thrust, which he did through 1989. Thrust's principal business activity was the die-cutting of membrane spacers and faceplates for telephone sets.

From 1983 until Mr. Culley's 1989 departure from Thrust, Thrust produced membrane spacers and faceplates for AT&T, Thrust's largest customer. The record establishes that, sometime in 1983, Mr. Culley entered into a bribery and kickback scheme with Andrew Lloyd, a senior buyer at AT&T's Shreveport, Louisiana operations site. Under the scheme, Mr. Culley paid Mr. Lloyd money in return for Mr. Lloyd's influence in directing AT&T business to Thrust. Mr. Culley inflated the prices charged to AT&T in order to finance the kickback payments to Mr. Lloyd.

In 1987, when he was negotiating with Princeton for the sale of Thrust, Mr. Culley made several material false statements and omissions regarding the past business practices and financial affairs of Thrust. Specifically, he failed to disclose the illegal bribery and kickback schemes with AT&T and another large customer. He also represented to Princeton that Thrust's books and records had been properly maintained in accordance with legal requirements although he knew that for several years he had made false entries to conceal the use of corporate funds for personal expenditures. Furthermore, Mr. Culley was aware that he had filed false corporate tax returns. In addition, Mr. Culley failed to disclose to Princeton that his former long-term plant manager and former sales manager were in business together in direct competition with Thrust.

In September 1988, as part of an investigation by the Internal Revenue Service ("IRS"), Mr. Culley was served with a federal grand jury subpoena. In October 1989, Princeton filed a civil action against Mr. Culley and High-Tech, Inc. (formerly Thrust) demanding rescission of the sale of Thrust's assets, plus damages. In September 1990, the federal grand jury issued a 31-count indictment charging Mr. Culley with fraud, commercial bribery, racketeering, and tax evasion. In June 1991, AT&T filed a civil action against Mr. Culley demanding damages for fraud.

In July 1991, the criminal and civil cases against Mr. Culley were resolved in a combined settlement agreement. He pleaded guilty to several counts of the indictment, including two counts of mail fraud for his scheme to defraud AT&T through a bribery and kickback arrangement and for his scheme to defraud Princeton through the fraudulent sale of Thrust. He also agreed to liquidate his assets, to pay $1.2 million in restitution to AT&T and $1.8 million in restitution to Princeton in settlement of the civil suits against him, and to pay the IRS and the United States an amount to be determined in satisfaction of criminal tax and forfeiture claims. In November 1991, a federal judge sentenced Mr. Culley to seven years imprisonment and three years probation.

When he filed his tax return for the year 1991, Mr. Culley computed his tax liability using I.R.C. § 1341, which provides a special rule favorable to the taxpayer. The rule applies when a taxpayer repays money in a current year that belongs to someone else, but was money that he received and included in gross income in a prior year. Mr. Culley claimed that the $3 million paid to AT&T and Princeton in 1991 was a restoration of amounts that had been included in his gross income in 1988, and on which he had paid tax. Thus, according to Mr. Culley, § 1341 permitted him to reduce the tax he owed in 1991 by the decrease in tax for 1988 which would have resulted if the $3 million had been excluded from income in 1988. Accordingly, Mr. Culley computed a reduction in tax for 1991 of $860,235, which created a net credit of $712,929 for 1991. After adjusting for estimated tax payments, Mr. Culley demanded a refund of $652,424.

The IRS audited Mr. Culley's 1991 return and disallowed the $860,235 credit he had claimed under I.R.C. § 1341. Instead, the IRS permitted Mr. Culley to deduct the restitution payments as a capital loss in 1991 to the extent allowable--$219,796 to eliminate reported capital gains, plus $1,500, as permitted by I.R.C. § 1211--and to carry forward further losses to the extent the Code permitted. After paying the amount the IRS assessed for the 1991 tax year, Mr. Culley in 1995 filed a refund claim in which he claimed the benefit of I.R.C. § 1341. The IRS denied Mr. Culley's refund claim, and Mr. Culley filed a refund suit in the Court of Federal Claims.

In its motion for summary judgment, the Government argued that Mr. Culley was not entitled to § 1341 treatment for the payment made to AT&T because payments made by AT&T entered Thrust's gross income, not Mr. Culley's. The Government also argued that Mr. Culley was not entitled to § 1341 treatment for the payment made to Princeton because he did not have an "unrestricted right"--as required by § 1341--to the proceeds of the transaction. In his own motion for summary judgment, Mr. Culley claimed he was entitled to § 1341 treatment because he had the ability to dispose of the money at issue when it was received. He also claimed that payments from AT&T entered his income because Thrust was a subchapter S corporation, see I.R.C. § 1361, and he was the sole shareholder. Upon discovering that Thrust was actually a subchapter C corporation, the Government moved to amend its answer to include a defense under 28 U.S.C. § 2514 that Mr. Culley's claim should be forfeited because he intentionally made a false statement to the court.

The Court of Federal Claims granted the Government's motion for summary judgment, finding that Mr. Culley was not entitled to § 1341 treatment with respect to the restitution payments to AT&T and Princeton because neither the payments received from AT&T nor the proceeds of the sale of Thrust to Princeton entered Mr. Culley's gross income. The Court of Federal Claims also determined that Mr. Culley had forfeited his claim against the Government because he knowingly misrepresented Thrust's corporate status with the intent to deceive the Government. Mr. Culley appeals the judgment of the Court of Federal Claims to this Court.

DISCUSSION

In reviewing a trial court's grant of summary judgment, we must make an independent determination as to whether the standards for summary judgment have been met. See McKay v. United States, 199 F.3d 1376, 1380 (Fed. Cir. 1999). We view the evidence in a light most favorable to the non-movant, and draw all reasonable inferences in its favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). A motion for summary judgment is properly granted if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c).

1.

Mr. Culley claims the benefit of I.R.C. § 1341, which Congress enacted to address a particular situation arising under the 'claim of right' doctrine. Under that doctrine, a taxpayer who receives income "under a claim of right and without restriction as to its disposition" must include the amount in his gross income for the year in which it was received, even though it is later determined that the taxpayer must repay the amount. United States v. Skelly Oil, 394 U.S. 678, 680 (1969) (citing North Am. Oil Consol. v. Burnet, 286 U.S. 417, 424 (1932)). Before the enactment of I.R.C. § 1341, a taxpayer who included an item in gross income in one year, and who repaid the item in a later year, was entitled to a deduction for the repayment only in the year of repayment. See United States v. Lewis, 340 U.S. 590, 591-92 (1951). The tax benefit from such a deduction might be less than the tax paid on the amount in the year of receipt if, for example, tax rates have changed or the taxpayer is in a lower tax bracket. See Skelly Oil, 394 U.S. at 681.

Congress enacted I.R.C. § 1341 to alleviate the possible inequities when a taxpayer reports income in the year he receives money, but incurs a loss in a later year when he is adjudged liable to repay that money to another. See id. at 681-82 (citing H.R. Rep. No. 83-1337, at 86-87 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4436; S. Rep. No. 83-1622, at 118-19 (1954),...