Greenstein v. Comm'r of Revenue, 9429-R

CourtTax Court of Minnesota
Writing for the CourtWendy S. Tien, Chief Judge.
PartiesJane I. Greenstein and Jon H. Schwartzman, Appellants, v. Commissioner of Revenue, Appellee.
Docket Number9429-R
Decision Date24 September 2021

Jane I. Greenstein and Jon H. Schwartzman, Appellants,
v.

Commissioner of Revenue, Appellee.

No. 9429-R

Tax Court of Minnesota, Regular Division, Ramsey County

September 24, 2021


This matter came before the Honorable Wendy S. Tien, Chief Judge of the Minnesota Tax Court, on the parties' cross motions for summary judgment.

Eric Johnson, Attorney at Law, represents appellants Jane I. Greenstein and Jon H. Schwartzman.

Jennifer Kitchak, Assistant Minnesota Attorney General, represents appellee Commissioner of Revenue.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

The court, upon all the files, records, and proceedings herein, now makes the following:

ORDER

1. Appellants' motion for summary judgment is denied.

2. The Commissioner's motion for summary judgment is granted as to the following grounds: (1) that the Commissioner's assessment pursuant to Minnesota Statutes section 289A.38 was timely; (2) that the court should determine Appellants' 2008 Minnesota income tax liability is $213 less than stated in the Commissioner's order; and (3) that the issue of "innocent spouse relief" is not properly before the court.

3. The Commissioner's motion for summary judgment is denied as to the grounds that Appellants are bound by adjustments to federal taxable income they agreed to with the IRS, for purposes of Minnesota tax liability.

4. The parties will contact the court administrator within 20 days of this order to schedule a conference with the court pursuant to Minnesota Rule of Civil Procedure 16.01.

IT IS SO ORDERED.

MEMORANDUM

Wendy S. Tien, Chief Judge.

I. Background

The underlying facts material to the parties' cross-motions are not disputed.[1] On September 30, 2015, the Internal Revenue Service ("IRS") issued a Notice of Deficiency to Appellants Jon Schwartzman and Jane Greenstein for the 2008 tax year.[2] The IRS concluded that Appellants' 2008 income tax return understated their taxable income for that year by $9, 543, 353, found a tax deficiency of $3, 185, 145, and assessed a 20% accuracy-related penalty.[3]

On October 13, 2015, Appellants petitioned the United States Tax Court for redetermination of the 2008 federal tax deficiency and penalty (the "USTC Appeal").[4] In the USTC Appeal, Appellants disputed the IRS's audit findings regarding: (a) $1, 194, 502 in disallowed Schedule C environmental remediation expenses; (b) recapture of $136, 242 in depreciation on the sale of an airplane; (c) $25, 000 in other disallowed Schedule C expenses; (d) $996, 015 in additional gross receipts; (e) a disallowed $2, 000, 000 loss related to an investment with Bernard Madoff (the "Madoff loss deduction"); (f) $500, 000 in additional income related to a covenant not to complete; (g) a Schedule E loss from Schwartzman Company, Inc.; (h) $973, 100 in additional capital gain income; and (i) the accuracy-related penalty.[5]

While the USTC Appeal was pending, but before it was scheduled for trial, between February 2016 and October 2017, Appellants' then-counsel communicated with IRS personnel about the disputed issues regarding the 2008 federal tax deficiency, [6] sending additional substantiation for environmental and other expenses Appellants claimed as deductions on Schedule C of their federal return.[7] By the end of July 2016, the parties reported to the U.S. Tax Court that they "had numerous conferences concerning the issues in this case and ha[d] narrowed the issues by partial settlement." [8] Following over a year of further correspondence, meeting, and negotiation, [9] the parties reached a tentative agreement in October 2017, embodied in a proposed decision document (the "Decision Document") prepared by an IRS Appeals Officer, by which Appellants would offer to settle the USTC Appeal with a lesser tax deficiency of $1, 126, 592.[10]The Decision Document was accompanied by a Form 5278 Statement of Income Tax Changes showing the settlement computation for the lower, revised proposed tax deficiency, along with a Form 4549B schedule of Income Tax Examination Changes summarizing how the tax deficiency was calculated.[11]

Counsel for both Appellants and the IRS executed and filed the Decision Document, and it was entered as an order by the U.S. Tax Court on November 17, 2017 (the "USTC Decision").[12]The USTC Decision determined that, by agreement, the taxpayers' 2008 federal income tax deficiency was $1, 126, 592, plus interest.[13] The USTC Decision became final on February 19, 2018. See 26 U.S.C. §§7481 & 7483.

On July 25, 2018, within six months of the USTC Decision becoming final, Appellants, through new counsel, sent the Minnesota Department of Revenue a "Notice of Federal Tax Change pursuant to Minn. Stat. §289A.38 subd. 7" for the 2008 tax year (the "Notice").[14] In the Notice, Appellants stated that, while they had reached a settlement in the USTC Appeal, they "disagree[d] with all aspects of the settlement" for purposes of Minnesota tax, and "adhere[d] to the reporting on their original returns[.]" The Notice did not detail how the federal determination was incorrect or explain why it did not change Appellant's Minnesota tax due.[15]

After receiving the Notice, the Minnesota Department of Revenue obtained workpapers from the IRS related to Appellants' 2008 federal tax liability.[16] The IRS provided information including an Appeals Transmittal form, an Appeals Case Memo, a Schedule of Adjustments, and a Form 5278 Statement of Income Tax Changes related to Appellants' 2008 federal tax liability (collectively, the "Appeals Memo").[17] On December 26, 2018, the Commissioner notified Appellants of her intent to "accept[] the compromise amounts agreed to with the IRS and finalized before the U.S. Tax Court February 19, 2018." [18] The Commissioner further asserted "[e]ach of the categories of income agreed to in the February 19, 2018 agreement between the taxpayer and the IRS are properly includable in Minnesota taxable income." [19] On the same date, she also sent a Consent to Change Tax form, which applied the final settlement adjustments to Appellants' Minnesota income tax return for 2008, plus interest, but without any penalty.[20]

Instead of consenting to the change in tax, however, on January 25, 2019, Appellants wrote to the Commissioner identifying two specific items from the IRS settlement with which they disagreed.[21] The first issue related to the settlement of the Madoff loss deduction, which reduced the claimed amount from $2, 000, 000 to $1, 500, 000.[22] The second issue concerned the recapture of airplane depreciation.[23] Appellants did not assert the Minnesota assessment was untimely and stated that "the statute of limitations for Minnesota is open for 2008 in this case." [24]

The Commissioner issued a tax order with a notice date of January 30, 2019, [25] and Appellants timely filed an administrative appeal on March 28, 2019.[26] The administrative appeal repeated Appellants' position that they were not bound by their federal settlement.[27] Following the exchange of correspondence regarding their respective legal positions, [28] the Commissioner issued a Notice of Determination on Appeal (the "Commissioner's order").[29] The Commissioner's order affirmed the assessment reasoning "[t]he fact that the taxpayers agreed with the IRS to adjust their federal tax income in their settlement in the United States Tax Court is indicative of the taxpayers' federal taxable income that is required to be reported to the State of Minnesota." [30]Appellants then timely filed their Notice of Appeal.[31]

The Notice of Appeal "dispute[s] the factual basis in its entirety for the Minnesota income tax determined in the Notice of Determination on Appeal." [32] Appellants assert the statute of limitations for assessments in Minnesota Statutes section 289A.38, subdivision 1 and contend because their federal assessment was settled, there was no change to their income, deductions, or credits for 2008.[33] Appellants also assert the existence of entitlement to "innocent spouse" relief for Ms. Greenstein.[34] The Commissioner did not assert affirmative defenses in the return and answer.[35]

The parties cross-moved for summary judgment, on somewhat differing grounds.[36]Appellants seek summary judgment on the grounds the Commissioner's assessment was barred by the statute of limitations in Minnesota Statutes section 289A.38, subdivision 1.[37] The Commissioner seeks summary judgment on four grounds: (1) that the Commissioner's assessment pursuant to Minnesota Statutes section 289A.38 was timely; (2) that Appellants are bound by adjustments to federal taxable income they agreed to with the IRS, for purposes of Minnesota tax liability; (3) that the court should determine Appellants' 2008 Minnesota income tax liability is $213 less than stated in the Commissioner's order; and (4) that the issue of "innocent spouse relief" is not properly before the court.[38]

A hearing was held on the cross-motions for summary judgment on July 9, 2021. The court ordered supplemental briefing on July 16, 2021.[39]

II. Governing Law

Minnesota Statutes section 271.06, subdivision 7 (2020), provides that, in general, the Minnesota Rules of Evidence and Civil Procedure govern the procedures in the tax court, where practicable. Cnty. of Aitkin v. Blandin Paper Co., 883 N.W.2d 803, 810 (Minn. 2016) (noting application of rules of evidence to tax court proceedings); Piney Ridge Lodge v. Comm'r of Revenue, 718 N.W.2d 861, 862 n. 1 (Minn 2006) (observing both the rules of evidence and civil procedure govern in tax court proceedings).

A. Summary Judgment

Summary judgment is to be granted "if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Minn. R. Civ. P. 56.01; Henson v. Uptown Drink, LLC, 922 N.W.2d 185, 189-90 (Minn. 2019). Summary judgment "permits the court to make a...

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