In re Steffen,

• Decision Date: 03 July 2006
• Docket Number: No. 8:06-CV-29-T-24TGW.,8:06-CV-29-T-24TGW.
• Citation: 349 B.R. 734
• Parties: In re Terri L. STEFFEN, Debtor. Terri L. Steffen, Appellant, v. The United States of America, Appellee.
• Court: U.S. District Court — Middle District of Florida

349 B.R. 734

In re Terri L. STEFFEN, Debtor Terri L. Steffen, Appellant, v. The United States of America, Appellee.

No. 8:06-CV-29-T-24TGW.

United States District Court, M.D. Florida, Tampa Division.

July 3, 2006.

Edward J. Peterson, III, Harley Edward Riedel, II, Stichter, Riedel, Blain & Prosser, PA., Tampa, FL, for Appellant.

Mary Apostolakos Hervey, U.S. Dept. of Justice, Washington, DC, for Appellee.

ORDER

BUCKLEW, District Judge.

This cause comes before the Court on an appeal from a final order of the United States Bankruptcy Court for the Middle District of Florida entered on October 31, 2005. Appellant, Terri L. Steffen, filed a Brief. (Doc. No. 11). Appellee, United States of America, filed a Brief in Response. (Doc. No. 20). Appellant, Terri L. Steffen, filed a Reply Brief. (Doc. No. 21).

I. Standard of Review

The Court independently reviews the bankruptcy court's decision. See In re Bush, 62 F.3d 1319, 1322 (11th Cir.1995). The bankruptcy court's findings of fact are subject to a clearly erroneous standard of review, and the bankruptcy court's conclusions of law are reviewed de novo. See id; In re Chase & Sanborn Corp., 904 F.2d 588, 593 (11th Cir.1990).

II. Procedural History and Factual Background

Appellant, Terri L. Steffen, appeals the bankruptcy court's order denying Debtor Terri L. Steffen's tax refund claim made pursuant to 26 U.S.C. § 1341. The factual background leading to this bankruptcy appeal involves a lengthy litigation between Paul A. Bilzerian and the Securities and Exchange Commission ("SEC").¹

Paul A. Bilzerian ("Bilzerian") and Terri L. Steffen ("Steffen") are husband and wife. On September 27, 1989, Bilzerian was convicted of securities fraud and conspiracy to defraud the United States in the United States District Court for the Southern District of New York. U.S. v. Bilzerian 926 F.2d 1285 (2nd Cir.1991), cert. den. 502 U.S. 813, 112 S.Ct. 63, 116 L.Ed.2d 39 (1991). The convictions were based on transactions Bilzerian made between May 1985 and October 1986 involving the common stock of Cluett, Peabody and Company, Inc. ("Cluett") and the Hammermill Paper Company ("Hammermill"). Id. at 1289.

Bilzerian and Steffen filed joint income tax returns for the tax years 1985 and 1986. In their 1985 tax return, Bilzerian and Steffen included $2,350,067.00 in net income from the Bilzerian Brodovsky partnership. (Government's Exhibit 23). This income was generated from the purchase and sale of Cluett stock. (Doc. No. 11 at 5). In their 1986 tax return, Bilzerian and Steffen included $16,068,617.00 in net income from various partnerships. (Government's Exhibits 24, 25). This income was generated from the purchase and sale of Hammermill stock.

Following the criminal conviction, the SEC brought a civil suit against Bilzerian in the United States District Court for the District of Columbia ("D.C.Court") seeking disgorgement of any illegal profits Bilzerian had received from the fraud involving the Cluett and Hammermill stock. On January 28, 1993, the D.C. Court ordered Bilzerian to disgorge $4,821,124.00 in total profits gained from the Cluett stock and $28,319,663.07 in total profits gained from the Hammermill stock. S.E.C. v. Bilzerian, 814 F.Supp. 116 (D.D.C.1993) ("Disgorgement Order").

On August 21, 2000, the D.C. Court found Bilzerian in civil contempt of the Disgorgement Order. S.E.C. v. Bilzerian, 112 F.Supp.2d 12 (D.D.C.2000). The D.C. Court found that Bilzerian was able to pay at least part of the Disgorgement Order, and that Bilzerian had "transferred his substantial assets into a complex ownership structure of off-shore trusts and family-owned companies and partnerships," which included: Overseas Holding Limited Partnership ("OHLP"), Overseas Holding Company ("OHC"), Bicoastal Holding Company ("BHC"), and The Paul A. Bilzerian and Terri L. Steffen 1995 Revocable Trust ("1995 Trust"). Id. at 18-23.

On December 22, 2000, the D.C. Court entered an order appointing Deborah R. Meshulam as a receiver ("Receiver") for the purpose of "identifying, marshaling, receiving, and liquidating" Bilzerian's assets in order to satisfy of the disgorgement order. SEC v. Bilzerian, 127 F.Supp.2d 232 (D.D.C.2000). On May 11, 2001, the D.C. Court entered an order temporarily freezing assets in which Bilzerian had an interest. (Debtor's Exhibit 37). The D.C. Court found that Bilzerian had an interest in all the assets of the 1995 Trust, the OHLP, the OHC, the BHC, the Loving Spirit Foundation ("Loving Spirit"), and the Puma Foundation ("Puma") (collectively the "Entities"). The Entities had assets in Wells Fargo Bank accounts, and the OHLP owned the real property located at 16229 Villareal de Avila, Tampa Florida ("Tampa Property"). (Debtor's Exhibit 37 at 3, 7).

On May 29, 2001, Steffen filed a voluntary bankruptcy petition under Chapter 11 in the bankruptcy court in the Middle District of Florida. (Doc. 395 at 3). On June 1, 2001, the D.C. Court entered an order reaffirming that court's May 11, 2001 Order and ordered that the Wells Fargo Bank transfer the assets in the frozen accounts into the registry of the D.C. Court. (Debtor's Exhibit 38). The D.C. Court also held that it had jurisdiction over the Tampa Property.

Steffen voluntarily intervened in the SEC's case against Bilzerian to challenge the freezing of the Wells Fargo accounts and the Tampa Property. (Doc. No. 370 trial transcript, 58-59, 110).² On December 19, 2001, Steffen and the Entities³ voluntarily entered into a settlement agreement with the SEC in which Steffen agreed to transfer a fifty percent interest in the Tampa Property and fifty percent of the assets in the Wells Fargo accounts to the Receiver. Pursuant to the consent agreement, the remaining fifty percent of the profits from the sale of the Tampa Property and fifty percent of the assets in the Wells Fargo accounts would be released to Steffen or the, appropriate entity after the transfer. (Debtor's Exhibit 39 at 9; Government's Exhibit 15 at 3). Bilzerian was not a party to this agreement.

On November 4, 2001, the Internal Revenue Service ("IRS") filed a Proof of Claim with the bankruptcy court in Steffen's bankruptcy case in the amount of $5,856,992.75. (Doc. No. 395 at 4). On February 6, 2002, Steffen filed an Objection to, the Claim filed by the IRS and contended she did not owe any taxes, and she was entitled to a tax refund pursuant to 26 U.S.C. § 1341.⁴ The bankruptcy court severed Steffen's claim for a refund pursuant to § 1341 from her objection to the IRS's claim. After this ruling, Steffen filed a motion requesting that the bankruptcy court find that she was entitled to a refund in the amount of $5,307,230.00. (Doc. No. 246). Both Steffen and the IRS filed cross motions for summary judgment as to Steffen's eligibility for a tax refund under § 1341. The bankruptcy court denied both motions. (Doc. No. 348). On May 24, 2005, the bankruptcy court conducted a trial on whether Steffen was entitled to a § 1341 tax refund.

On October 31, 2005, the bankruptcy court entered an order in which it denied Steffen's claim for a tax refund pursuant to 26 U.S.C. § 1341. (Doe. No. 395). On November 16, 2005, the bankruptcy court denied Steffen's motion for reconsideration. (Doc. No. 400).

III. Bankruptcy Court's Order

In its order denying Steffen's claim for a tax refund pursuant to § 1341, the bankruptcy court found that Steffen had failed to establish a nexus between her transferring certain assets to the Receiver in 2002 and the Cluett and Hammermill income that Bilzerian and Steffen included in their tax returns for the years 1985 and 1986. In addition, the bankruptcy court found that Steffen had submitted no evidence that any of the property transferred to the Receiver was her own property as opposed to Bilzerian's property. Accordingly, the bankruptcy court held that Steffen had not met her burden of proving that she was entitled to a § 1341 refund. (Doc. No. 395).

IV. Issues on Appeal

Steffen raises three issues on appeal: (1) whether the bankruptcy court erred when it failed to apply 26 U.S.C. § 7491, which Steffen argues should have shifted the burden of proof to the government with respect to her refund claim, (2) whether there is a nexus between the Cluett and Hammermill income earned by Bilzerian and Steffen in 1985 and 1986 and Steffen's transfer of property to the Receiver in 2002, and (3) whether Steffen transferred at least $3,000.00 of her property to the Receiver, thereby satisfying § 1341's statutory requirement that the amount of the deduction exceed $3,000.00. (Doc. No. 11 at 9).

A. Section 1341

Pursuant to 26 U.S.C. § 1341,⁵ a taxpayer is entitled to relief if in one year the taxpayer included an item as gross income and paid tax on that income, then in a subsequent year is compelled to return the item. Griffiths v. United States, 54 Fed.Cl. 198, 201 (2002). In order to qualify for relief under 26 U.S.C. § 1341, the taxpayer bears the burden of proving that an item was included in her gross income for the prior taxable year and that she had an apparent unrestricted right to the item. Then, in a later tax year, it is established that she no longer had an unrestricted right to that item, and the amount of the deduction exceeds $3,000.00. Id. at 202. Since § 1341 does not independently create a deduction, a taxpayer must be entitled to a deduction under another provision of the code. Id. at 202.

B. Nexus

Steffen argues that the bankruptcy court erred in finding that she failed to establish a nexus between the profits from the Cluett and Hammermill stock included as income on her 1985 and 1986 tax returns and her transfer of assets to the Receiver in 2002. (Doc. No. 11 at 14).

"Courts have universally ruled that there must be a `substantive nexus between the right to the income at the time of receipt and the subsequent circumstances necessitating a refund.'" Cinergy Corporation v. U.S., 55 Fed.Cl. 489, 507 (2003) (citation omitted)....