In re Rodriguez
| Citation | 387 B.R. 76 |
| Decision Date | 22 April 2008 |
| Docket Number | No. 98-85361-478.,98-85361-478. |
| Parties | In re Mario C. RODRIGUEZ, Debtor. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
Pryor & Mandelup, L.L.P., by A. Scott Mandelup, Esq., Westbury, N.Y., Counsel to Chapter 7 Trustee.
United States Department of Justice, Tax Division, by Bartholomew Cirenza, Esq., Washington, D.C., for United States of America.
The Debtor filed for bankruptcy relief under Chapter 11 of the Bankruptcy Code on May 29, 1998 (the "Petition Date"). The case was converted to a Chapter 7 case on December 30, 1998 and the Chapter 7 Trustee (the "Trustee") was appointed. The United States of America, Internal Revenue Service (the "IRS") timely filed a proof of claim on March 26, 1999, in the amount of $363,496.84 consisting of a priority claim in the amount of $277,919.54 for federal income taxes and interest owed for the 1996 tax year and a general unsecured claim for penalties in the amount of $85,577.25 ("Claim No. 11").
Before the Court are issues relating to the Trustee's motion for summary judgment which seeks to disallow Claim No. 11 and requests for a refund of federal income taxes paid for the 1995 and 1996 tax years (the "Summary Judgment Motion") and the IRS's cross motion to dismiss claiming, inter alia, that the Court lacks jurisdiction over the refund claims pursuant to 26 U.S.C. § 6511 (the "Cross Motion to Dismiss").
This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334. This contested matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (E), and (0) and 11 U.S.C. §§ 502(b) and 505(a).
The following constitutes the Court's findings of fact and conclusions of law as mandated by Bankruptcy Rule 7052 of the Federal Rules of Bankruptcy Procedure.
During 1992, the Debtor was employed by an investment banking firm, known as J. Gregory & Co., Inc. ("J. Gregory"). In 1993 and 1994, the Debtor received $312,458 and $350,841, respectively, in income from J. Gregory which consisted mainly of commissions he earned as a stockbroker. J. Gregory changed its name in 1994 or 1995 to Sterling Foster & Company, Inc. ("Sterling Foster"). Adam Lieberman ("Adam") was the president and nominal shareholder of Sterling Foster. Because Sterling Foster was a sub-chapter S corporation for federal income tax purposes, the taxable income of Sterling Foster would have been reportable on Adam's federal income tax return.
In 1995, the Debtor became a branch manager for Sterling Foster with supervisory responsibilities and the Debtor reported directly to Adam. In the beginning of 1995, Adam told the Debtor that he was going to provide the Debtor with additional income above the Debtor's customary commissions and bonuses through Sterling Foster and that the Debtor should deposit the additional funds into an account. As directed by Adam, the Debtor formed a corporate entity named Chestnut Enterprises, Inc. ("Chestnut") of which he was the president and sole shareholder and opened two accounts at Chase Manhattan Bank ("Chase"). One of the Chase bank accounts, account no. XXX-X-XX8267, was in the Debtor's name (the "Rodriguez Chase Account") and the other Chase bank account, account no. XXX-X-XX1667, was in the name of Chestnut (the "Chestnut Chase Account"). Adam also instructed the Debtor to use the same accountant that prepared his personal and Sterling Foster's tax returns to prepare the Debtor's income tax returns. Adam had Sterling Foster give additional funds to the Debtor with the hope that Debtor would write checks if and when Adam requested. The Debtor gave Adam the impression that if asked, he would write those checks using those monies he received and deposited into these Chase accounts.
Most of the funds in the Chase accounts came from Sterling Foster and Adam. In 1995, the Debtor deposited approximately $2,020,000 from Sterling Foster and $2,116,000 from Adam into the Rodriguez Chase Account. In 1996, the Debtor received more than $6,750,000 from Sterling Foster and deposited approximately $5,556,291 of these funds into the Rodriguez Chase Account and $1,250,000 of these funds into the Chestnut Chase Account. The Debtor would often transfer funds from the Rodriguez Chase Account to the Chestnut Chase Account and then transfer the funds back to the Rodriguez Chase Account when he needed to write a check in his name. Most of the checks the Debtor issued with respect to the additional funds he received from Sterling Foster and Adam came from the Rodriguez Chase Account.
The Debtor issued checks from the Chase Accounts to various individuals at Adam's request during his employment at Sterling Foster. On two occasions, Adam asked the Debtor to issue checks to his brother, David Lieberman ("David"). The Debtor had no relationship to David. On December 4, 1995, the Debtor received more than $2 million from Adam which the Debtor deposited into the Rodriguez Chase Account. In response to Adam's first request, the Debtor transferred to David $1,500,000 from the Rodriguez Chase Account by check no. 302, dated December 18, 1995. On February 28, 2006, the Debtor received more than $2,750,000 from Sterling Foster which he deposited into the Rodriguez Chase Account. In response to Adam's second request, the Debtor transferred $2,650,000 to David by check no. 314, dated March 11, 1996. Both transfers to David totaled $4,150,000. In each instance, there Was no significant activity in the Chase accounts between the time the funds were deposited into the Rodriguez Chase Account and when the Debtor issued a check to David. David testified that he does not recall receiving checks from the Debtor or why the Debtor would give him funds even though upon a review of the checks he acknowledged that he must have endorsed the checks. While Adam testified that he had a vague recollection that he asked the Debtor to issue checks to David to help his brother start up a business, the Court finds this testimony to be unreliable as to the purpose behind the transfer.
In addition to issuing checks to various individuals at Adam's request, the Debtor used the funds in the Rodriguez Chase Account that he received from Sterling Foster to pay the federal and state taxes on his earned income and on the funds Adam had transferred to him from Sterling Foster for the 1995 and 1996 tax years. The Debtor also issued checks from the two Chase accounts to himself, his tailor and others to satisfy his own financial obligations and to his mother for her benefit.
For the 1995 tax year, the Debtor received a 1995 IRS Form W-2 showing $2,180,036 in earned income. The Debtor filed his 1995 federal income tax return on October 17, 1996 and reported $888,020 in federal income taxes owed. The Debtor made payments toward the federal income tax liability throughout 1996 with the last payment made on December 30, 1996.
Based upon the 1996 Form W-2 the Debtor received from Sterling Foster showing earned income of $6,671,254, the Debtor filed his 1996 federal income tax return on September 9, 1998 and reported $2,448,050 in federal income taxes owed. Of this tax liability, the Debtor had paid a total $2.2 million by April 15, 1997 through employer withholding and a payment of estimated taxes when he filed a request for an extension of time to file his 1996 tax return. Since then, the IRS has been applying payments received from the Debtor and any overpayment of federal income taxes (i.e., tax refunds) for subsequent tax years to reduce the balance owing on the 1996 federal income tax return as follows:
Date Applied Amount Source
February 8, 1999 $1,897.00 overpaid credit for the
1997 tax year
June 21,1999 $1,037.00 overpaid credit for the
1998 tax year
April 15, 2001 $ 827.00 overpaid credit for the
2000 tax year
September 3,2001 $ 165.70 overpaid credit for the
2000 tax year
April 15, 2004 $3,863.00 overpaid credit for the
2003 tax year
May 20,2004 $1,266.00 payment
April 15, 2004 $ 31.00 overpaid credit for the
2004 tax year
June 19, 2006 $ 82.00 payment
IRS's Claim No. 11 seeks the balance of the unpaid federal income tax liability for the 1996 tax year.
Sterling Foster ceased operations in 1997. The United States had brought charges against Adam, the Debtor and other individuals for securities law violations. Adam entered a guilty plea agreement on August 20, 1997 in a criminal action brought against him. The plea agreement required Adam to transfer to the United States Marshal Services ("U.S. Marshal Services") various assets he had, including "[a]ny and all funds transferred by [him] to his brothers, David Lieberman and Andrew Lieberman during the time period from approximately January 1, 1994 to the date of this agreement, including, but not limited to, $5,000,000 presently held by David Lieberman and Andrew Lieberman."
David transferred $4,750,000 by check no. 368, dated February 1, 1998, from his Chase Bank account to Adam. Adam deposited the $4,750,000 he received from David and $250,000 he received from his brother Andrew into an account at Fidelity Investments. On February 7, 1998, Adam transferred $5 million from his Fidelity Investments account to the U.S. Marshal Services as part of the $14.5 million in restitution payments he was ordered to pay that eventually went to a victims' compensation fund established to compensate former customers of Sterling Foster. Adam claimed a deduction for the restitution payments on his amended 1997 federal income tax return and carried the unused portion of the deduction back 3 years. As a result, Adam received a significant reduction in federal...
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... ... United States v. Kearns, 177 F.3d 706, 711 (8th Cir.1999); In re Rodriguez, 387 B.R. 76, 89 (Bankr. E.D.N.Y.2008); United States v. Henderson (In re Guardian Trust Co.), 260 B.R. 404, 414 (S.D.Miss.2000); In re Dunhill Medical, Inc., Case No. 92-37700, 1996 WL 354696, at * 5 (Bankr.D.N.J. March 27, 1996). See also 124 Cong. Rec. H 11095, H 11, 110-111 (daily ed ... ...
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Mutual Marine Office, Inc. v. Joy Construction Corporation, 2008 NY Slip Op 32882(U) (N.Y. Sup. Ct. 10/16/2008)
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