Free-Pacheco v. United States

Decision Date16 July 2014
Docket NumberNo. 12-121T,12-121T
PartiesENRIQUE FREE-PACHECO, Plaintiff, v. UNITED STATES, Defendant.
CourtCourt of Federal Claims


No. 12-121T

United States Court of Federal Claims

Filed: June 25, 2014
Redacted Version Issued for Publication: July 16, 20141

Federal Tax Deductions; Foreign
Nonresident; 26 U.S.C. § 871; Trade
or Business; 26 C.F.R. § 1.183-2;
Continuity and Regularity;
Expectation of Profit; Gambling; Slot

Jeff S. Hood, Procopio, Cory, Hargreaves & Savitch LLP, San Diego, C.A., for plaintiff. With him was Patrick Martin, Procopio, Cory, Hargreaves & Savitch LLP.

Fredrick C. Crombie, Trial Attorney, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, D.C., for defendant. With him were Gregory S. Knapp, Trial Attorney, Court of Federal Claims Section, David I. Pincus, Chief, Court of Federal Claims Section and Kathryn Keneally, Assistant Attorney General.



Plaintiff, Enrique Free Pacheco, a Mexican citizen and nonresident of the United States, brought suit to recover a tax refund in excess of $16,360,455.00, not including interest, withheld by the United States Internal Revenue Service (IRS). This sum, according to plaintiff, represents the amount the IRS automatically withheld from plaintiff's jackpot winnings while plaintiff gambled at slot machines in Las Vegas from 2007 through 2010.2 Plaintiff claims that he was engaged in slot machine gambling as a

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"trade or business" within the United States, and, therefore, that his taxes only should be based on his net income, consistent with I.R.C. § 871(b).3 Plaintiff claims that he should be allowed to treat his slot machine wagers as business expenses, in accordance with I.R.C. § 165(d) (2006), and that he is due a substantial refund of his tax withholdings as a result.


Plaintiff, Enrique Free Pacheco, is a "nonresident alien" under the terms of I.R.C. § 871, who lives in Los Mochis, Sinaloa, Mexico. Due to his poor health, plaintiff was not able to travel or give video testimony during the trial. Plaintiff's attorney filed a declaration, which included reports by two medical professionals, indicating to the court that plaintiff has been suffering from [redacted medical issues]. Defendant, therefore, agreed to take video testimony of plaintiff in lieu of trial testimony. On May 22, 2012, plaintiff's counsel conducted a "Videotaped Interview" of plaintiff in San Diego, California, which was conducted under oath. Plaintiff's and defendant's counsel were present during the interview. The next day, on May 23, 2012, defendant's counsel conducted a "Videotaped Deposition" of plaintiff in San Diego, California, which similarly was conducted under oath. Plaintiff's and defendant's attorneys were also present for the May 23, 2012 deposition. On August 16, 2012, approximately three months later, the parties returned and conducted another joint, videotaped deposition of plaintiff, under oath, once again in San Diego, California. Both parties questioned plaintiff during the August 16, 2012 deposition. The interview and both depositions were conducted

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with the assistance of a translator, given Mr. Free's limited, English fluency. On December 20, 2012, plaintiff's attorney filed another declaration, which included a report by a medical professional, informing the court that plaintiff's condition had worsened [redacted], and that it was recommended to plaintiff not to travel away from his home in Mexico. The parties agreed, and the court admitted, plaintiff's earlier videotaped interview and deposition testimony into the record, instead of taking live testimony at the trial. Mario Uriel Ramos Vazquez, one of plaintiff's sons-in-law, likewise was not able to testify at trial. The court, with the parties' consent, also agreed to admit the transcript of Mr. Vazquez's deposition into the record.

On multiple occasions, the court and counsel for both parties discussed the impact of using plaintiff's videotaped interviews and depositions. Plaintiff's counsel stated: "I think that myself and Mr. Crombie [defendant's counsel] did a good job of addressing most, if not all, of the issues that we needed to address," and that the videotaped interview and depositions provide "an impression of Mr. Free, how credible he was when he testified." Plaintiff's counsel stated that "although there were some occasions during the testimony where, for example, everything seemed to be about 10 to 12 years ago," errata sheets were provided, and, nonetheless, "from a factual standpoint, I think that a lot of his testimony correlates to the documents. It was consistent with the other folks' testimony. So I don't have any real concerns back in May. And again, we came back in August, and the issues that we addressed at that time, I think they were accurate." Plaintiff's counsel also stated that Mr. Free, in his interview and depositions, "was lucid, coherent, and understood those questions when he was testifying that he was pursuing this as a trade or business." Plaintiff's counsel further indicated that that there was no difference between the interview and depositions in terms of the validity of plaintiff's statements.

Plaintiff stated at his interview that he is married to Maria Ines Wong Gonzalez, and has three daughters, Maria Dolores Free Wong, Diana Free Wong, and Deyra Erika Free Wong, all of whom live close to plaintiff in Mexico. Although plaintiff stated at his interview that he only completed up to his second year of middle school in Mexico, he indicated that he has had a successful career as a businessman, first in construction in Chihuahua, Mexico, and then in agriculture in Los Mochis, Mexico. Plaintiff also stated that he established a potato farming business, Tenabri,4 which upon his retirement, around 2001, brought in an annual income of approximately Mex$10,000,000.005 a year. Plaintiff's daughter, Maria Dolores Free Wong, and two of plaintiff's sons-in-law, Mario Uriel Ramos Vazquez, and Fernando Medina Llamas, testified at trial. All three of

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them testified that plaintiff founded Tenabri. Plaintiff stated at his interview that, while he ran Tenabri, he "made all the decisions," including financing and planting. Mr. Vazquez agreed at his deposition that plaintiff had been "actively involved" with the company in the past.

Plaintiff further testified at his deposition that he ran the company without any written business plan, instead relying on experience learned from fifty years of work and from his parents, who were farmers. Plaintiff stated at his interview that it was a successful business. Plaintiff further stated that he retired ten to twelve years ago because of "the financial situation and because of my physical condition." Plaintiff testified at his deposition that, additionally, "the business [Tenabri] was not that good anymore." Plaintiff and Mr. Vazquez both suggested that Tenabri in recent years has been doing worse and currently may not be profitable.

Plaintiff testified at his deposition that, before retirement, he held an approximately sixty to seventy percent interest in the business, which was organized as a limited liability company. Plaintiff further indicated at his deposition that he sold the business to his family, including his daughters and their husbands. According to plaintiff's interview statements and deposition testimony, plaintiff currently owns between twenty to thirty percent of the company. Mr. Vazquez testified that plaintiff currently has a "small percentage" of the business. Mr. Llamas testified at trial and Mr. Vazquez indicated at his deposition that the two now manage the "day-to-day" operations of Tenabri since plaintiff's retirement. Plaintiff confirmed this during his interview. Plaintiff, Mr. Llamas, Mr. Vazquez, and Ms. Dolores Free Wong all stated that plaintiff still had played a role in the business between 2007 and 2010, as an advisor, but was not actively involved in Tenabri outside of advising. Plaintiff testified, and the two sons-in-law, Mr. Vazquez and Mr. Llamas, corroborated, that from 2007 through 2010 plaintiff helped advise on "what type of plants they should grow . . . what type of seeds we're going to use." Plaintiff stated in his interview that advising for Tenabri currently takes up "very little" of his time, but testified at his deposition that advising for Tenabri takes up ten to fifteen percent of his time, or one to two days a week. According to Mr. Llamas' testimony, between 2007 and 2010, plaintiff would spend two hours weekly consulting with him on the business. Mr. Vazquez did not testify as to how much time he spent with plaintiff. Although Mr. Vazquez testified at his deposition that plaintiff never received any compensation between 2007 and 2010, both plaintiff and Mr. Llamas testified that plaintiff received a dividend from the business in 2007, but no information was offered as to the amount of that dividend, or about any other dividend plaintiff received.

In addition to advising at Tenabri, plaintiff stated at his interview, and repeated at his deposition, that he actively traded stocks on the Mexican stock exchange. Plaintiff testified at his deposition that he traded in both...

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