In Re Terri L. Steffen, 8:08-cv-2337-T-24.

• Decision Date: 28 April 2009
• Docket Number: No. 8:08-cv-2337-T-24.,8:08-cv-2337-T-24.
• Parties: In re Terri L. STEFFEN, Debtor.Terri L. Steffen, Appellant/Cross-Appellee,v.United States of America, Appellee/Cross-Appellant.
• Court: U.S. District Court — Middle District of Florida

429 B.R. 32

In re Terri L. STEFFEN, Debtor.

Terri L. Steffen, Appellant/Cross-Appellee,

v.United States of America, Appellee/Cross-Appellant.

No. 8:08-cv-2337-T-24.

United States District Court,

M.D. Florida,

Tampa Division.

April 28, 2009.

COPYRIGHT MATERIAL OMITTED

Edward J. Peterson, III, Stichter, Reidel, Blain & Prosser, PA, Tampa, FL, for Terri L. Steffen.

Mary Apostolakos Hervey, U.S. Department of Justice - Tax Division, Washington, DC, for U.S.

ORDER

SUSAN C. BUCKLEW, District Judge.

This cause comes before the Court on an appeal and cross-appeal of certain orders from the bankruptcy court. The parties have fully briefed the issues on appeal. (Doc. No. 10, 20, 31). Upon review of the record, the Court finds that the bankruptcy court's decisions should be affirmed in part and reversed in part.¹

I. Background

This is just one of many appeals in the Terri L. Steffen bankruptcy case. The issues on appeal in this case relate to the IRS's $5,856,721.11 claim in Steffen's bankruptcy case and Steffen's objection thereto. Specifically, Steffen challenges the claim to the extent that it is affected by the IRS's treatment of certain taxable events, namely: the worthlessness of her Bicoastal stock, the alleged theft of her money by her interior designer, and the alleged bad debt she wrote off. She filed the tax returns at issue jointly with her husband, Paul Bilzerian.

The major, and hotly contested, issue in this appeal is the determination of what year the Bicoastal common stock became worthless. The Bicoastal common stock ² was owned by a limited partnership, BPLP-1, in which Bilzerian and his company Bicoastal Acquisition Corporation, were general partners, along with five other limited partners. Thus, Bilzerian and Steffen owned Bicoastal's common stock indirectly through their ownership of BPLP-1.

In 1989, several events occurred that Steffen argues caused the Bicoastal stock to become worthless that year. Specifically, Steffen points out that claims were filed against Bicoastal totaling more than $500 million, Bicoastal defaulted on some of its debt obligations, and on November 11, 1989, Bicoastal filed a voluntary petition seeking Chapter 11 bankruptcy relief. As a result, Steffen amended her 1989 tax return in June of 1991 to reflect that the Bicoastal stock became worthless in 1989.

The IRS, however, contends that while those events caused the Bicoastal stock to have no current liquidation value in 1989, the stock still had potential future value until Bicoastal's claims against Semi-Tech under their royalty agreement were settled in 1993 for far less than Bicoastal had valued its claims (Bilzerian valued Bicoastal's claims against Semi-Tech at more than $500 million). As such, the IRS took the position that the stock did not become worthless until 1993.

The bankruptcy court agreed with the Government, finding that the cumulative effect of the events that occurred in 1989 did not leave the Bicoastal stock without any potential future value by the year end.³ Instead, the bankruptcy court determined that the stock did not become worthless until 1993 based on the following: (1) in 1990, Bilzerian indirectly transferred interests in Bicoastal in full satisfaction of debts totaling $7.5 million; (2) in 1991, Bilzerian granted an indirect interest in Bicoastal as collateral for a $9.5 million loan from Oxley ⁴; (3) Bilzerian represented to the Chapter 7 trustee in his bankruptcy case that BPLP-1, whose primary asset was the Bicoastal stock, had significant value; (4) in 1993, prior to resolution of the Semi-Tech litigation, Bilzerian and Steffen attempted to transfer a 25% interest in BPLP-1 to Bilzerian's Chapter 7 trustee in order to settle claims against Bilzerian; (5) Bilzerian and his Chapter 7 trustee objected to the $92 million settlement of the Semi-Tech litigation because they believed that the value of Bicoastal's claims against Semi-Tech (the primary asset of Bicoastal) was substantially higher; and (5) Steffen, as president of Loving Spirit Foundation, listed its interest in BPLP-1 as an asset in the amount of $595,830 on its 1993 tax return.

Steffen also argued that if the Bicoastal stock did not become worthless in 1989, then it certainly became worthless, at the very latest, in 1992, when Bicoastal's common stock was cancelled under the plan confirmed by the bankruptcy court in Bicoastal's bankruptcy case. The bankruptcy court rejected this argument, noting that even though the common stock was technically cancelled, the sole common stockholder (BPLP-1), could still potentially recover money under the plan based on its prior stock ownership, because the amended confirmed plan provided that BPLP-1 would receive money if the assets of Bicoastal (which, at that time, consisted of the claims against Semi-Tech) were sufficient to pay the creditors and preferred stockholders. It was not until 1993, when the Semi-Tech case was settled for only $94 million, that one could determine that BPLP-1 would not receive any money for the shares of the Bicoastal common stock it held prior to their cancellation.

In addition to finding that the year that the Bicoastal stock became worthless was 1993, the bankruptcy court also determined: (1) Steffen's adjusted basis in the stock, (2) whether she was entitled to a theft loss deduction in 1991, and (3) whether she was entitled to a bad debt deduction in 1993. On September 16, 2008, after the bankruptcy court made these determinations, the bankruptcy court issued its final order determining Steffen's income tax liabilities for 1991, 1992, and 1993. (BR Doc. No. 612). Thereafter, the parties appealed the order, based on the underlying determinations regarding the Bicoastal stock, theft loss deduction, and bad debt deduction.

II. Standard of Review

This Court conducts a de novo review of the bankruptcy court's legal conclusions and must accept the bankruptcy court's factual findings unless they are clearly erroneous. See In re JLJ, Inc., 988 F.2d 1112, 1116 (11th Cir.1993). A factual finding is clearly erroneous if a review of all of the evidence leaves this Court with the definite and firm conviction that a mistake has been made. See General Trading Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1494 (11th Cir.1997).

The determination of the year in which a stock become worthless is a factual finding, and the taxpayer has the burden to prove her entitlement to the deduction by a preponderance of the evidence. See Boehm v. C.I.R., 326 U.S. 287, 293-94, 66 S.Ct. 120, 90 L.Ed. 78 (1946); Genecov v. U.S., 412 F.2d 556, 560 (5th Cir.1969); Wagner v. U.S., 2003 WL 691029, at *3 (M.D.Fla. Jan. 21, 2003); Figgie Int'l, Inc. v. C.I.R., 1985 WL 14990 (U.S.Tax Ct. July 23, 1985). Likewise, the question of whether a debt has become worthless is also a question of fact, and the taxpayer has the burden to prove her entitlement to the deduction by a preponderance of the evidence. See Quinn v. C.I.R., 111 F.2d 372, 373 (5th Cir.1940); Southwestern Life Ins. v. U.S., 560 F.2d 627, 644 (5th Cir.1977). Finally, the taxpayer also must prove her entitlement to a theft loss deduction by a preponderance of the evidence. See Kaplan v. U.S., 2007 WL 2330841, at *5-6 (M.D.Fla. Aug. 15, 2007); Yates v. C.I.R., 1988 WL 131493 (U.S.Tax Ct. Dec. 13, 1988).

III. Issues on Appeal

Steffen raises two issues on appeal: (1) the year that the Bicoastal stock became worthless, and (2) her adjusted basis in the stock. The Government also raises two issues on appeal: (1) whether Steffen was entitled to take the 1991 theft loss deduction, and (2) whether Steffen was entitled to take the 1993 bad debt deduction. Accordingly, this Court will address each issue.

A. Year Bicoastal Stock Became Worthless

On January 6th and 7th of 2003, the bankruptcy court held an evidentiary hearing to determine the year in which the Bicoastal stock became worthless. (BR Doc. No. 185). Thereafter, on April 18, 2003, the bankruptcy court found that the Bicoastal stock did not become worthless until 1993. (BR Doc. No. 162). Steffen moved for reconsideration, and the bankruptcy court held a hearing on the matter on December 2, 2003. (BR Doc. No. 225). On February 4, 2004, the bankruptcy court issued its order affirming its decision that the Bicoastal stock did not become worthless until 1993. (BR Doc. No. 233).

Steffen now appeals the bankruptcy court's finding that the Bicoastal stock did not become worthless until 1993. This Court has read all of the transcripts of the above referenced hearings. Based on the evidence before the bankruptcy court, this Court finds that the bankruptcy court's factual finding that the Bicoastal stock did not become worthless until 1993 is not clearly erroneous.

Nevertheless, Steffen argues that the bankruptcy court made several errors. However, none of her arguments have merit. The Court will address each argument in turn.

Steffen argues that the bankruptcy court improperly applied the presumption of correctness. This argument has no merit, as the bankruptcy court stated in its order on reconsideration that even if the presumption lost its probative force, Steffen “nevertheless failed to establish by a preponderance of the evidence that the deduction in 1989 was proper.” (BR Doc. No. 233, p. 5).

Next, Steffen argues that the Government failed to prove that the Bicoastal stock had value on December 31, 1989, December 31, 1990, December 31, 1991, and December 31, 1992. This argument has no merit, as the burden is on Steffen to prove her entitlement to the deduction, and the bankruptcy court found that Steffen did not show that the Bicoastal stock became worthless prior to 1993.

Next, Steffen argues that the bankruptcy court erred by considering the value of the Semi-Tech lawsuit to Bicoastal, since that lawsuit was not filed until 1990, and as such, its value cannot be used to support a finding that it had value to Bicoastal in 1989. This argument is flawed. The bankruptcy court...