In re Steffen, 01-09988-8P1.

• Citation: 294 B.R. 388
• Decision Date: 18 April 2003
• Docket Number: No. 01-09988-8P1.,01-09988-8P1.
• Parties: In re Terri L. STEFFEN, Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida

294 B.R. 388

In re Terri L. STEFFEN, Debtor.

No. 01-09988-8P1.

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

April 18, 2003.

COPYRIGHT MATERIAL OMITTED

Harley E. Riedel, II, Stichter, Riedel, Blain & Prosser, Tampa, FL, for debtor.

Mary Apostolakos Hervey, Washington, DC, for creditor.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION

ALEXANDER L. PASKAY, Chief Judge.

This is a yet to be confirmed Chapter 11 case of Terri L. Steffen (Debtor). In the Debtor's Chapter 11 case, the United States of America (Government) filed a proof of claim, Claim No. 6, in the total amount of $5,856,721.11.¹ (Claim No. 6/Db. Ex. 1). The Claim by the Government is based on adjustments following an examination of the Debtor's joint tax returns, together with her spouse, Paul A. Bilzerian (Bilzerian), for the years 1985, 1986, 1991, 1992, and 1993. On February 6, 2002, the Debtor filed "Objection to Claim filed by the Internal Revenue Service" (Doc. No. 40), where she stated that she was not indebted to the Internal Revenue Service (IRS), or at least not in the amounts claimed. She also contended that there was: (1) the disallowance of a deduction by the Debtor and Bilzerian of loss of value of their stocks, which according to them became worthless in the year 1989 and (2) an erroneous determination that the Debtor understated her capital gain from the disposition of South Bay Fashion Center (South Bay) during the year 1992. This Objection was originally an objection to Claim No. 3, and by Order of this Court (Doc. No. 80), the Objection stood over to the amended claim of the Government, Claim No. 6. On March 14, 2002, the Debtor filed "Pretrial Memorandum for Preliminary Hearing" (Doc. No. 54), which outlined eleven additional specific objections to Claim No. 6, which the parties agreed would be treated as an "amended objection."

Prior to the scheduled final evidentiary hearing, the parties agreed that the issues would be bifurcated and the first two issues should be tried first. Accordingly, the two issues, which were scheduled for final evidentiary hearing, are the following:

(1) Whether the Debtor is entitled to claim a loss of the value of the stock in excess of $23,366.705 in Bicoastal Corporation (Bicoastal).

(a) How much did the Debtor and Bilzerian invest in Bicoastal?

(b) What year did their investment become worthless?

(2) What is the basis of the Debtor's and Bilzerian's interest in South Bay for purposes of determining the amount of any capital gain realized upon foreclosure of the property in 1992.

At the trial, this Court heard testimony of witnesses considered the documents offered and introduced into evidence, and now makes the following findings of fact and conclusions of law.

Brief Background of Facts

In 1987, Bilzerian formed Bilzerian Partners Limited Partnership-1 (BPLP-1), a Florida limited partnership. At that time, Singer Company² (Singer) was a publicly traded company. During 1987, BPLP-1, through Bilzerian and Bicoastal Acquisition Corporation (Bicoastal Acquisition), began to acquire shares of Singer in the open market, and ultimately acquired approximately two million shares at a cost of approximately $87 million. Following these purchases, BPLP-1 made a formal tender offer to purchase the remaining common stock of Singer for $50 per share. BPLP-1 was comprised of two general partners: Bilzerian and Bicoastal Acquisition, as well as five limited partners. According to the testimony of Bilzerian, the Debtor and Bilzerian directly or indirectly owned approximately 30.6% of BPLP-1.

The leveraged buyout was financed by a consortium of banks, Shearson, Lehman Brothers Holdings, Inc. (Shearson), and Mesa Holding Limited Partnership (Mesa). Both Shearson and Mesa received stock of Singer (Shearson received Class B common stock and Mesa received both Junior Preferred and Class C common stock). At the end of the leveraged buyout (in the year 1987), the equity structure of Singer was as follows: $3.50 Senior Preferred (publicly held); Junior Preferred (Mesa); Class A common (BPLP-1); Class B common (Shearson); and Class C common (Mesa).

During the relevant times, Singer created Link Flight Simulation Corporation (Link Fight) as its wholly owned subsidiary. Link Flight was the successor-in-interest to the Singer-Link Flight Simulation Division of Singer. Link Flight was in the defense contract business, providing electronics and training systems to the Government pursuant to several large defense contracts with the Government. Link Flight was involved in providing products that supported certain military aircraft programs including the Cobra, Apache, and Blackhawk helicopters; F-16 fighters; B-52 bombers; and other aircrafts.

Following the leveraged buyout, in or around September of 1988, Singer exercised its right to trigger the valuation of the stock of Bicoastal between BPLP-1, Mesa and Shearson. Ultimately, in 1989, Singer now called Bicoastal, as a result of the name change, purchased the remaining stock of Mesa and Shearson and issued promissory notes to them for the purchase prices of their Class B and Class C common stock.

In the year 1989, the Government brought a complaint against Bicoastal and its subsidiaries under the False Claims Act, and sought damages in the amount of $231 million, together with civil penalties. In this action, the Government claimed that Bicoastal engaged in a scheme to defraud the Government in that the defendants falsely represented cost estimates (Urda litigation). (Db.Ex. 9). Several other lawsuits ensued and ultimately, as described below, Bicoastal filed for Chapter 11 protection under the Bankruptcy Code. This was the beginning of the business demise of Bicoastal.

Determination of Year that Debtor Can Claim Worthless Stock Deduction

a. Summary of Each Parties' Position

Bilzerian and the Debtor (together, Taxpayers), as noted earlier, are husband and wife. They filed joint income tax returns, as amended for the years at issue: 1985, 1986, 1991, 1992, and 1993. (Db. Exs. 26, 27, 30, 31, 32, 33, 34, 35 and IRS Exs. 12-18). On or about June 20, 1991, the Taxpayers filed an amended income tax return for the year 1989. (Db.Ex. 30). In the amended return, the Taxpayers asserted that their investment in Bicoastal had become worthless in the year 1989, resulting in a loss of $23,366.705. Accordingly, the Debtor asserts that she is entitled to claim a capital loss from the worthlessness of her Bicoastal stock in the tax year 1989, and in the amount of $23,366.705.

In support of this proposition, the Taxpayers identified several events in the year 1989, which they claim demonstrate that the stock in Bicoastal had no realistic prospect of value and that Bicoastal was insolvent. Through the testimony of David L. Redmond, the former CFO and President of Bicoastal, as well as a member of its Board of Directors, the Taxpayers identified at least eight adverse events, which in their opinion, demonstrate that the common stock of Bicoastal became worthless in 1989. These events include the following: (1) arbitration of a claim of General Instrument Corporation for damages in the amount of $34 million; (2) filing of an action by CAE for damages in excess of $100 million; (3) granting by a Connecticut court of class certification in certain retiree benefit litigation; (4) filing of an action by HSSM seeking $42 million; (5) filing of an action by Bankers Trust of suit to compel Bicoastal to post additional collateral; (6) "delivery" to Bicoastal of a claim by the Defense Logistics Agency for more than $100 million; (7) entry of injunction in the Urda litigation, which prohibited Bicoastal from making payments to Mesa and Shearson, which then caused a default in Bicoastal's obligation to Mesa and Shearson; and (8) filing of a Voluntary Petition seeking Chapter 11 relief on November 11, 1989.

In opposition, the Government asserts that the Debtor can only claim a loss in the year in which the loss is sustained and the loss was not sustained until the tax year 1993, when the litigation involving Bicoastal and Semi-Tech MicroElectronics (Far East), Ltd. (Semi-Tech) was finally resolved. In these regards, the Government asserts that Bilzerian, himself, estimated that the royalty agreement at issue was valued at $500 million, an amount that would have been more than sufficient to allow for a distribution to not only all creditors but also to the holders of the common stock. Moreover, during the Chapter 11 case, Bicoastal continued to operate and Bilzerian acted in a manner, which supported his contention that the Semi-Tech litigation would result in a distribution to shareholders. Therefore, according to the Government, the stock did not become worthless until the year 1993, when this Court approved the compromise of the Semi-Tech litigation for $94 million, or significantly less than the estimated $500 million. These are the facts relevant to the first issue, i.e., the year to claim the loss of value of the Bicoastal stock.

b. Legal Analysis and Findings

It is well established that the taxpayer bears the burden of proving the right to and the amount of any claimed deduction. New Colonial Ice v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348 (1934). Because the taxpayer is the person who holds the information and is required to produce it, the burden of proof never shifts to the United States. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). A deficiency determination issued by the Government is presumptively correct. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933).

Section 165(g) of the Internal Revenue Code (IRC) authorizes a deduction for a loss from a worthless security, including stock in a corporation. 26 U.S.C. § 165(g)(2)(A). A taxpayer may deduct a Section 165(g) loss "only for the taxable year in which the loss is sustained." Treas. Reg. § 1.165-1(d)(1). The Supreme Court...