Goeller v. United States
| Decision Date | 20 March 2013 |
| Docket Number | No. 10-731T,10-731T |
| Parties | ROBERT F. GOELLER and JEANETTE M. GOELLER, Plaintiffs, v. THE UNITED STATES, Defendant. |
| Court | U.S. Claims Court |
Tax refund suit; Cross-motions for summary
judgment under RCFC 56; Deductibility of
"theft" loss under I.R.C. § 165(c)(3);
Definition of "theft;" Edwards; Reliance upon
state law definitions of crimes contrary to
normal rules for interpreting Federal tax
statutes; Burnet v. Harmel; Anomalous results
produced by incorporating state criminal law
into Federal taxing statute; Common law
definition of "theft" established; Questions of
facts as to allowance and amount of
deduction; Trial.
OPINIONMichael P. Marsalese, The Marsalese Law Group, PLLC, Southfield, MI, for plaintiffs.
Gregory S. Knapp, Tax Division, United States Depart of Justice, with whom was Assistant Attorney General Kathryn Keneally, for defendant.
In this tax refund suit, plaintiffs, Robert F. Goeller and Jeanette M. Goeller (the Goellers), claim a deduction under section 165(c)(3) of the Code1 for their 2004 taxable year. They assert that officials of Complete Property Resources (CPR), a real estate business, misappropriated funds that they had invested in that firm, thereby causing a "theft" loss. Based on this alleged loss, plaintiffs also seek refunds for 2001, 2002, and 2003, due to loss carrybacks under section 172 of the Code.
CPR was the trade name for several Columbus, Ohio-based companies engaged in the business of buying and selling residential real estate from 1992 through at least 2004. CPR was financed by private investment; it issued promissory notes to private lenders that were secured by mortgages on CPR properties. CPR also offered "tandem investments," whereby an investor "purchased" a CPR property by making a capital contribution to CPR of 20 percent of the purchase price and taking out a loan for the remainder. CPR then paid the investor interest on both the loan and the capital contribution. In the course of its business, CPR regularly sold the property that secured a given promissory note, obtaining, for that purpose, a release from the affected investors. CPR sometimes obtained multiple mortgages on a single property; in some cases, investors, including plaintiffs, agreed to have a promissory note secured by a future, not yet acquired, CPR property. As a result of these practices, the CPR property associated with any given promissory note intermittently changed, as was reflected on financial statements sent to investors.
Plaintiffs began investing in CPR in 1995, after meeting with CPR president, Steve Vilardo (Vilardo). Plaintiffs participated in several promissory note and tandem investments offered by CPR. The terms of these investments were usually negotiated between Robert Goeller and Vilardo, typically over the phone. At times, plaintiffs agreed to alter the security for their promissory notes in the fashion described above. In 1998, plaintiffs moved from Columbus, Ohio, to Santa Rosa, California, where they have resided since; after moving to California, plaintiffs continued to invest in CPR, investing in the three properties at issue here - 545 Elberne Ave. (Elberne); 810 Coral Tree Ct. (Coral); and 4516 White Leaf Way (White Leaf) - between July 2003 and February 2004.
From 1995 to 2004, plaintiffs wrote twelve checks to CPR, making investments totaling $769,542. While seven of those checks can be traced to particular promissory notes, the remaining five - totaling $133,542 - cannot. Additionally, plaintiffs invested approximately $48,000 in CPR tandem investments and $91,420 in Individual Retirement Account (IRA) funds held in CPR accounts. Between 1995 and 2004, plaintiffs received regular payments of interest and returns of principal from CPR. Plaintiffs, however, cannot substantiate how much they actually received during this period.
In July 2004, plaintiffs phoned Vilardo, requesting a $260,000 return of investment capital. Vilardo agreed, noting that a CPR investment associated with plaintiffs' Elberne note was due to close soon, and that the proceeds from that could be used to satisfy partially plaintiffs' request.2 Plaintiffs anticipated that two other properties associated with theirpromissory note investments - Coral and White Leaf - might be liquidated or remortgaged to satisfy their request. Prior to this time, plaintiffs' requests for returns of capital had always been honored by CPR, albeit sometimes slightly delayed. But, in this case, the requested $260,000 return was not forthcoming.
Later - toward the end of 2004 - plaintiffs were chagrined to learn that the Elberne property had been sold. They began to speak with Teresa Klaus, wife of CPR Vice President and Secretary Fred Klaus, in an effort to determine not only why they had not received payment from CPR, but also why certain properties previously listed on their financial statements were no longer available as security. In subsequent conversations with Vilardo in 2004, plaintiffs determined that three properties - Elberne, Coral, and White Leaf - were no longer available as security and that CPR had not recorded plaintiffs' mortgages on these properties.3 Though the parties dispute what transpired next, as 2004 ground to a close, plaintiffs continued to speak with Theresa Klaus and Vilardo, seeking to obtain further information and repeatedly requesting the $260,000 return of capital. Around November 2004, CPR determined that it could no longer honor its obligations to private investors, and, in December 2004, it defaulted on its investment obligations. On December 23, 2004, plaintiffs sent Vilardo an email containing wiring instructions for transferring the requested $260,000 return of capital.4
In early 2005, a committee of CPR creditors was formed to keep its investors informed of the company's financial situation and the status of their investments. Shortly after it was formed, this committee began sending correspondence to investors and holding meetings. Plaintiffs participated in some meetings by phone. At about the same time, CPR began sending letters to investors explaining its restructuring efforts. For example, in a letter dated January 28, 2005, CPR described a restructuring program under which it would reduce interest rates on private investments and temporarily withhold payments to investors. In a letter dated April 8, 2005, CPR outlined a proposal under which unsecured investments would be converted to equity in CPR, while the terms of secured investments would remain unchanged but with a lower rate of return. In response to this letter, on April 25, 2005, plaintiffs informed Fred Klaus that they needed more information about their investments, including the extent to which they were secured, before they could agree to CPR's proposed restructuring plan.
During the restructuring process following CPR's default, plaintiffs received additional returns of principal and interest on their tandem investments and certain promissory notes. As to the former, plaintiffs received a return of capital on all but one investment. With regard to their promissory note investments, plaintiffs received post-default returns of capital as secured properties were sold, but nothing on their unsecured investments.
Despite its restructuring efforts, by a letter dated December 5, 2005, CPR informed investors that it intended to file a prepackaged reorganization plan under Chapter 11 of the bankruptcy code, 11 U.S.C. § 1101, et. seq.5 Pursuant to the plan, CPR proposed making the current unsecured creditors the equity owners of the company. Enclosed with the letter was a ballot that creditors could use to vote on the plan. Plaintiffs, among 90 percent of CPR's investors, voted to accept CPR's proposed bankruptcy reorganization plan.
On August 15, 2006, CPR and its affiliated entities filed voluntary Chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the Southern District of Ohio. The claim schedules filed by CPR included secured claims for at least five of plaintiffs' tandem and promissory note investments, but did not include the Elberne, Coral, or White Leaf properties. On September 11, 2006, plaintiffs filed an unsecured proof of claim in CPR's bankruptcy case for $708,000. Despite Vilardo's periodic expressions of regret and claims that he was personally obligated to CPR's investors, plaintiffs ultimately recovered nothing on this latter claim. (As part of the restructuring process, Vilardo lost both his home and farm, which were pledged as collateral for CPR investments.)
In early 2006, Plaintiffs hired Tobias Elsass of the Fraud Recovery Group, which also represents other CPR investors, to prepare a federal tax refund claim based on plaintiffs' CPR losses. On or about March 3, 2006, plaintiffs filed a Form 1040X amended tax return for 2004, which claimed a theft loss of $417,819 for that year under section 165(c), and a refund of $2,407.6 Plaintiffs also submitted a Form 1045, Application for Tentative Refund, on which they claimed carrybacks of the 2004 net operating loss resulting from the claimed section 165(c) deduction to years 2001 through 2003. The carryback refunds requested amount to $3,994 for 2001, $32,662 for 2002, and $19,286 for 2003.
During the examination of plaintiffs' claim, Elsass sent the Internal Revenue Service (IRS) a letter, dated October 3, 2007, explaining that in CPR's bankruptcy, plaintiffs realized an unsecured loss of $708,000, of which $300,690 was IRA funds, leaving a "theft" loss of$407,310.7 On November 19, 2007, the IRS denied plaintiffs' refund claim. On November 5, 2008, the IRS Appeals Office issued plaintiffs a notice of disallowance, stating that "[d]ue to changes to the December 31, 2004 tax year there is no net operating loss in 2004 and there is no amount to be carried back to the years ended December 31, 2001, December 31, 2002 and December 31, 2003." On October 28, 2010, plaintiffs instituted this action. Following...
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