Emax Fin. Grp. v. U.S. Virgin Islands
| Decision Date | 31 March 2012 |
| Docket Number | Civil Action No. 2009–086 |
| Citation | 56 V.I. 847 |
| Parties | EMAX FINANCIAL GROUP, LCC, Plaintiff, v. The UNITED STATES VIRGIN ISLANDS, and the Virgin Islands Bureau of Internal Revenue, Defendants. |
| Court | U.S. District Court — Virgin Islands |
OPINION TEXT STARTS HERE
Joseph A. DiRuzzo, III, Esq., Miami, FL For the Plaintiff.
Aquannette Y. Chinnery, Esq., St. Croix, U.S.V.I. For the Defendants.
This matter is before the Court on Plaintiff Emax Financial Group, LLC's Motion for Attorney's Fees, which was filed on October 27, 2010. (Dkt. No. 24). The matter was fully briefed, and a hearing was held on February 13, 2012. For the reasons that follow, Plaintiff's Motion for Attorney's Fees is denied.
Plaintiff Emax Financial Group, LLC (“EMAX” or “Plaintiff) is a limited liability company organized under the laws of the United States Virgin Islands. ( See Compl. ¶ 1, Dkt. No. 1). EMAX filed tax returns with Defendant Virgin Islands Bureau of Internal Revenue (“VIBIR” or “Defendant”) for tax years 2004–2007. (Compl. ¶¶ 14–17; see also Tax Returns, Dkt. Nos. 1–1 through 1–4).
On December 27, 2007, EMAX, through its accountant James Carney,1 filed a “Form 1139” with the VIBIR claiming a net operating loss (“NOL”) of $53,585,486 for tax year 2006, and seeking a tentative carryback adjustment for tax years 2004 and 2005 in the amounts of $2,217,233 and $729,836, respectively. (SeeDkt. No. 1–5).2 The VIBIR issued refund checks in amounts corresponding to the December 27, 2007 Form 1139 on October 28, 2008. (See Dkt. Nos. 1–7, 1–8).
On October 21, 2008, Plaintiff filed a Form 1139 with the VIBIR claiming a NOL of $250,273,895 for tax year 2007, and seeking a tentative carryback adjustment for tax year 2005 in the amount of $3,431,607. (See Dkt. No. 1–6). By letter dated December 8, 2008, Gail Johnson, a VIBIR revenue agent, wrote Carney “confirming” discussions held by teleconference earlier that day, and requesting a “written dialogue stating when, how, and where the claim [ sic ] NOL took place” as well as “supporting documents ... necessary to substantiate the NOL.”(Dkt. No. 13–6). The letter advised that failure to respond by December 22, 2008, would “result in disallowing the NOL for all applicable years.” Id. On December 22, 2008, Carney responded with a letter addressing seventeen questions posed by the VIBIR. (Dkt. No. 13–5). The letter indicated that EMAX would immediately provide certain documents related to its tax filings, employment contracts, payroll, and assets. EMAX further agreed to provide additional responsive documents that were in the possession of a third party at a later date. Id.
By letter dated January 21, 2009, Johnson responded to Carney indicating that she had received documents from him on December 22, 2008, but that “no substantiation has been presented for the $53,585,486 Net Operating Loss as requested on Form 1139 Corporation Application for Tentative Refund.” (Dkt. No. 13–4). She requested a “written dialogue stating when, how, and where the claim [ sic ] NOL took place ... with supporting documents such as an entity detailed flowchart ... and any other supporting documents [ ] deem[ed] necessary to substantiate the NOL.” Id. After advising of the need to be prepared “to fully explain the nature of the NOL along with supporting documents,” the letter concluded:
Your schedule to respond is February 3, 2009 at 9:00 a.m. If you are unable to provide the requested substantiation please sign the enclosed 4549s 3 for 2004 and 2005 disallowing the NOL carry back and return the form with any remittance made out to the Virgin Islands Bureau of Internal Revenue within ten (10) working days. Failure to act accordingly will result in the disallowance of the carry back and closing the case unagreed.
On January 30, 2009, Carney responded to Johnson's January 21, 2009 correspondence. (Dkt. No. 13–3). Included with the response was a three-page dialogue about the events leading to EMAX's demise and the nature of the NOL; a history of Pedrick and Heffernan's relationship to EMAX; an EMAX organizational chart; the tax histories of EMAX and its owners; and a spreadsheet regarding the financial breakdown of the NOL. Id. The three-page dialogue stated that “[b]y the end of 2007 EMAX experienced more than $250 million in losses.” Id. at 4. The spreadsheet reflected both the $53,585,486 NOL for tax year 2006 and the $250,273,895 NOL for tax year 2007. Id. at 8. The spreadsheet also indicated that $3,461,607 was the “Amt Due Taxpayer.”Id. (emphasis in original).
The January 30, 2009 Letter also stated that EMAX was simultaneously providing a banker's box with approximately 4,000 supporting documents. Id. In concluding, the letter noted:
These taxpayers have suffered huge catastrophic losses measured on a global basis ... Before the near collapse of the entire United States financial system these taxpayers honestly and faithfully paid in all tax due when, how and where the VIBIR required. We now expect the same display of integrity by the government to pay back those taxes previously paid in because the profits are now lost.
On June 19, 2009, Johnson sent another letter to Carney asking for further information, including details regarding EMAX's relationship to Mortgage Lenders Network and documents concerning how EMAX acquired capital to fund its loans. (Dkt. No. 13–2). The letter stated that “this may or may not be all that is needed for the audit” and that EMAX had until July 2, 2009, to respond, or the VIBIR would disallow the NOL and close the case without agreement. Id. EMAX replied on July 2, 2009, providing further documents and a response to the specific questions posed in the VIBIR's June 19, 2009 Letter. (Dkt. No. 13–1).
On July 29, 2009, counsel for Pedrick, Heffernan, and EMAX sent a letter to Ramon Carrasquillo, another employee of the VIBIR. (Dkt. No. 1–10). Among other things, the letter questioned Johnson's objectivity and requested that she be removed from the case and another auditor assigned. Id. The letter further stated that because “the requests for refunds of taxes were made more than six months ago, a refund suit is now timely” and that “EMAX, Mr. Pedrick and Mr. Heffernan have been deemed to have exhausted their administrative remedies.” Id. It noted that Pedrick, Heffernan and EMAX would file suit unless their refund claims were processed by August 24, 2009. Id. This letter was followed by another written communication to Carrasquillo, dated August 24, 2009, which extended the August 24, 2009 deadline to September 10,2009. (Dkt. No. 11–1).
On October 29, 2009, EMAX filed its Complaint. The Complaint alleges three causes of action: a claim for a refund under 26 U.S.C. § 7422 and attorney's fees under 26 U.S.C. § 7430 (Compl.¶¶ 27–33); a claim for unjust enrichment ( id. at ¶¶ 34–39); and a claim for conversion ( id. at ¶¶ 40–45). Heffernan and Pedrick filed separate but similar complaints on the same day. ( See Civ. Action 2009–087, Heffernan v. Bureau of Internal Revenue ; Civ. Action No.2009–088, Pedrick v. Bureau of Internal Revenue ).
On January 5, 2010, the VIBIR filed a Motion to Dismiss, arguing that EMAX's unjust enrichment and conversion claims were preempted by federal tax law. (Dkt. No. 8). Plaintiff filed its opposition on January 25, 2010. (Dkt. No. 9). In its reply brief, filed on February 18, 2010, the VIBIR argued, for the first time, that the Court lacked subject matter jurisdiction over EMAX's refund claim because EMAX had failed to exhaust its administrative remedies pursuant to 26 U.S.C. § 7422. (Dkt. No. 10). Specifically, the VIBIR cited 26 C.F.R. § 1.6411 and contended that, as of the time of the filing of its Complaint, EMAX had sought its NOL refund only through Form 1139 and that “[t]he filing of a Form 1139 is not a claim for credit or refund” sufficient to satisfy section 7422's administrative exhaustion requirement. Id. at 2. In a surreply filed on March 1, 2010, EMAX argued, among other things, that its Form 1139 and its multiple letters to the VIBIR regarding the NOL claim satisfied the exhaustion requirement under the “informal claim doctrine.” (Dkt. No. 13; see also Dkt Nos. 13–1 through 13–7). On March 10, 2010, the VIBIR filed a response to the surreply. (Dkt. No. 14).
On September 3, 2010, EMAX filed a “Notice of Partial Satisfaction,” indicating that on August 26, 2010, it had received a check from the VIBIR in the amount of $3,714,547.64. (Dkt. No. 17). Then, on March 7, 2011, the Court dismissed Counts II and III of the Complaint on the basis that the parties had conceded that Plaintiff's attorney's fees claim was the only remaining issue in the case. (Dkt. No. 30).
On October 27, 2010, EMAX filed the instant Motion for Attorney's Fees. (Dkt. No. 24). The VIBIR filed its opposition on November 10, 2010, arguing that the Court lacks subject matter jurisdiction over EMAX's refund suit because EMAX failed to exhaust its administrative remedies prior to filing suit. (Dkt. No. 27). EMAX filed its reply brief on November 17, 2010. (Dkt. No. 28).
On October 13, 2011, this Court issued an order requiring the parties to submit briefs addressing certain questions regarding the statutory and regulatory requirements underlying applications for tentative carryback adjustments, the VIBIR's processing of such applications, and the informal claim doctrine. (Dkt. No. 33). Following the Court's receipt of the parties' submissions (Dkt. Nos. 35 through 37) and further briefing on Plaintiff's Motion for Attorney's Fees (Dkt.Nos.50, 53), a hearing on this matter was held on February 13, 2012.
The VIBIR argues that this Court lacks subject matter jurisdiction over this case—and thus EMAX's attorney's fees claim—because EMAX failed to satisfy section 7422(a)'s administrative exhaustion requirement. In...
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