Devine v. United States

• Decision Date: 14 January 2021
• Docket Number: No. 18-871,18-871
• Parties: TIMOTHY C. DEVINE, Plaintiff, v. UNITED STATES, Defendant.
• Court: U.S. Claims Court

TIMOTHY C. DEVINE, Plaintiff,
v.
UNITED STATES, Defendant.

No. 18-871

United States Court of Federal Claims

January 14, 2021

FOR PUBLICATION

Keywords: RCFC 12(b)(1), 26 U.S.C. § 6511(d), 26 U.S.C. § 166, 26 C.F.R. § 1.166-1(c), Tax Refund Claim, Business Bad Debt Deduction, Net Operating Loss, American Recovery and Reinvestment Act of 2009

Michael James Maloney, Felicello Law P.C., New York, NY, for the plaintiff.

Miranda Bureau, Tax Division, U.S. Department of Justice, Washington, D.C., with whom was David Pincus, Tax Division, U.S. Department of Justice, Washington, D.C., for the defendant.

MEMORANDUM OPINION

HERTLING, Judge

The plaintiff, Timothy C. Devine, is a former music industry senior executive who in 2003 began investing in real estate. In 2004, Mr. Devine partnered with a general contractor and developer named Shauna Giliberti to purchase, rehabilitate, and rent or sell a Los Angeles mansion located at 2450 Solar Drive ("Solar Drive" project). Mr. Devine funded the Solar Drive project through monetary advances to Ms. Giliberti. Soon thereafter, Ms. Giliberti became unable to repay Mr. Devine for his contributions to the Solar Drive project.

This case concerns Mr. Devine's efforts to seek a business-bad-debt deduction for his asserted 2008 net operating loss ("NOL") attributable to the advances he made to the Solar Drive project and to elect to carry back his loss to tax years 2003-2007. Ordinarily, a taxpayer may only carry back a NOL for a period of up to two years. A NOL may be offset against taxable income for the two years preceding the occurrence of the NOL. Mr. Devine seeks to extend the carryback period and the statute of limitations to claim a refund either through 26 U.S.C. § 6511(d) or through a provision of the American Recovery and Reinvestment Act of 2009 ("ARRA"), Pub. L. 111-5, 123 Stat. 115, enacted in response to the 2008 financial crisis.¹

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The defendant, the United States, acting through the Internal Revenue Service ("IRS"), opposes the plaintiff's attempt to carry back his NOL to 2003-2007. The IRS had previously permitted a carryback to 2006 and 2007 and issued the plaintiff two refund checks. That two-year carryback did not satisfy the plaintiff, who sued for refunds he alleges are due to him for tax years 2003, 2004, and 2005. After the plaintiff filed this suit, the defendant altered its position and now argues that Mr. Devine was not entitled to a business-bad-debt deduction at all. The government has counterclaimed for the return of the two refund checks that it argues were issued in error.

Upon the completion of discovery, the defendant has moved both to dismiss and for summary judgment on the plaintiff's claim and to transfer its counterclaims to the Central District of California.

I. BACKGROUND

The plaintiff was a successful music industry senior executive. (ECF 39, Pl. Resp. Ex. A, A033.) He worked for Sony Music from 1995 until 2007. (Id.) From 2003 to 2005, he earned a salary of approximately $1 million annually. (ECF 36, Def. Mot. Ex. 19, A366.)

A. Real-Estate Development

In 2003, Mr. Devine decided to pursue a career in real-estate development after attending seminars on the real-estate industry. (ECF 39, Pl. Resp. Ex. A, A058.) He planned to identify and acquire properties for rehabilitation, intending to restore them and offer them for rent or sale. Based on the advice of his accountant, Mr. Devine set up separate holding companies for each of the properties he acquired. (Id. at A054.)

Later that year, Mr. Devine acquired two properties in connection with his new real-estate business: "Emerald Bay" in the Bahamas, and the "Breakers" in Playa Del Rey, California. (ECF 39, Devine Decl. ¶¶ 5-6, A02.) He directly managed the renovation and rental of those properties. (Id.)

In March 2004, Mr. Devine met Ms. Giliberti, a licensed general contractor and the principal of a real-estate-development company with knowledge of rehabilitation and redevelopment of residential properties. (ECF 39, Pl. Resp. Ex. A, A034-35.) Ms. Giliberti introduced Mr. Devine to the Solar Drive property, an 11,000-square-foot mansion located at 2450 Solar Drive in Los Angeles, situated on 22 acres in the Hollywood Hills with broad views over downtown Los Angeles. (Id.) The mansion required extensive restoration work.

Mr. Devine agreed to partner with Ms. Giliberti on the purchase and rehabilitation of the Solar Drive property. On May 6, 2004, Mr. Devine and Ms. Giliberti closed on their purchase of Solar Drive. The purchase price was $3.7 million. (ECF 36, Def. Mot. Ex 1.) Mr. Devine purchased his 50 percent share of the property as part of a like-kind exchange under I.R.C. § 1031. (Id., Ex. 9, Ex. 27.) Mr. Devine advanced the funds necessary to purchase the property. To acquire the property, he provided $4,050,464.30, $1,645,464.30 from his own funds and

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$2,405,000.00 from the proceeds of a loan he obtained in his own name.² (ECF 39, Pl. Resp. Ex. A, A079.)

Mr. Devine created Solar Drive, LLC, of which he was the sole member through another LLC, in conjunction with the Solar Drive project. (Id., Pl. Resp. Ex. A, A045-46.) Shortly after closing, Mr. Devine transferred his 50 percent tenant-in-common interest in the property to Solar Drive, LLC. (Id. at A062.)

On or around the purchase date of the Solar Drive property, Mr. Devine and Ms. Giliberti executed a Side Letter. It recited that each held an undivided 50 percent co-ownership interest in Solar Drive as tenants in common. (Id., Pl. Resp. Ex. C.) It provided that the parties would attempt to refinance the property as soon as possible after the closing, and that any proceeds from the refinancing would first be applied to reimburse the co-owners for monies advanced to improve and repair the property. (Id. ¶ 4.) The parties agreed to accept any bona fide offer for at least $15 million to purchase the property. (Id. ¶ 5.)

The Side Letter also specifically provided that:

[i]n the event the Co-Owners execute promissory note(s) between the two of them and said promissory note(s) relate to the Property . . . . [a]ll Promissory Notes shall be paid in full upon the due date stated in the Promissory Note or the sale or refinance of the Property, whichever shall occur first. In the event of a sale or refinance of the Property, any unpaid Promissory Notes shall be paid directly from the escrow that receives the proceeds of the refinance or sale.

(Id. ¶ 6.)

Mr. Devine and Ms. Giliberti also prepared a Co-Tenancy Agreement that was incorporated into the Side Letter and provided:

[a]ll benefits and obligations of the Property, including without limitation, income, revenue, operating expenses, debt, proceeds from sale or refinance or condemnation awards shall be shared by the Co-Owners in proportion to their respective ownership interest . . . . No Co-Owner may advance funds to another Co-Owner to meet expenses associated with that Co-Owner's Ownership Interest, unless the advance is recourse to the Co-Owner and is for a period not to exceed 31 days. Such advances shall be evidenced by a Promissory Note containing a market rate of interest.

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(Id., Pl. Resp. Ex. B ¶ 5.)

Although the Co-Tenancy Agreement itself was never signed, the Side Letter, which was signed, expressly incorporated the Co-Tenancy Agreement and provided that "[t]his agreement and the Co-Tenancy Agreement between the parties dated May 6, 2004" are integrated agreements that set forth the entire agreement between the parties. (Id., Pl. Resp. Ex. C ¶ 9.8.)

Mr. Devine agreed to pay Ms. Giliberti $1,600 per week for general contractor services for as long as Solar Drive needed improvements. (Id. ¶ 7.) These sums paid for renovations to the master bedroom, kitchen, and other areas of the house. (Id., Pl. Resp. Ex. C, A070.) The plaintiff's apparent intent was for Ms. Giliberti to reimburse him for 50 percent of the sums he advanced for improvements to Solar Drive "[b]ecause it was all going to benefit each of our ownership stakes in the property." (Id., Pl. Resp. Ex. A, A093.)

B. Purchase and Settlement Agreement and Subsequent Judgment

Around 2005, Mr. Devine began demanding that Ms. Giliberti repay the money she owed him. (ECF 39, Devine Decl. ¶ 16.) By 2006, Ms. Giliberti had pledged her 50 percent tenant-in-common interest in the Solar Drive property to several different lenders. (ECF 39, Pl. Resp. Ex. A, A117.) In April 2006, Ms. Giliberti filed for bankruptcy under Chapter 11; her bankruptcy was later converted to Chapter 7. (Id., Pl. Resp. Ex. N, Ex. X.) In the bankruptcy proceeding, Solar Drive, LLC filed a Proof of Claim evidencing the sums that Ms. Giliberti owed to Mr. Devine; the liquidated portion of these sums totaled $1,467,339.32. (Id., Pl. Resp. Ex. N.)

In August 2006, Solar Drive, LLC commenced an adversary proceeding against Ms. Giliberti in bankruptcy court seeking a determination that the amount she owed to Solar Drive, LLC was non-dischargeable pursuant to 11 U.S.C. § 523. (Id., Pl. Resp. Ex. O, A325 ¶ E.)

In 2007, Ms. Giliberti's 50 percent tenant-in-common interest in Solar Drive was foreclosed upon by the beneficiary of one or more deeds of trust she had granted. (Id. ¶ G.)

In early 2008, Ms. Giliberti was contacted by another lender willing to finance a buy-out of Mr. Devine's 50 percent interest in Solar Drive and to pay off the sums she owed. Mr. Devine and Ms. Giliberti commenced negotiations regarding a purchase price and satisfaction of the amounts she owed him. (Id.) While the co-tenants were negotiating the details of the sale, the global financial crisis hit.

In November 2008, Mr. Devine, Solar Drive, LLC, and Ms. Giliberti entered into a Purchase and Settlement Agreement ("2008 Agreement") concerning Solar Drive. The 2008 Agreement provided that "Devine provided the initial down payment for the purchase of the Property, fifty percent (50%) of which was deemed to be a loan to Giliberti." (Id. ¶ B.) Mr. Devine expended "more than $900,000 for the cost of...