In re Waters, Case No. 99-31833 (Bankr. Conn. 2/8/2008), Case No. 99-31833.

• Decision Date: 08 February 2008
• Docket Number: Doc. I.D. Nos. 477, 487, 527, 534, 538.,Case No. 99-31833.
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: IN RE: EDWARD J. WATERS, CHAPTER 7, DEBTOR.

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IN RE: EDWARD J. WATERS, CHAPTER 7, DEBTOR.

Case No. 99-31833.

Doc. I.D. Nos. 477, 487, 527, 534, 538.

United States Bankruptcy Court, D. Connecticut.

February 8, 2008.

Ann M. Nevins, Esq., Assistant U.S. Attorney, U.S. Attorney's Office, Bridgeport, CT, Attorney for Movant United States of America, Internal Revenue Service.

Peter Sklarew, Esq., Attorney, Tax Division, U.S. Department of Justice, Washington, DC, Attorney for Movant United States of America, Internal Revenue Service.

Edward J. Waters, Avalon Place, Darien, CT, Pro Se Debtor/Movant.

Joan E. Pilver, Esq., Assistant Attorney General, Attorney General's Office, Department of Revenue Services, Hartford, CT, Attorney for State of Connecticut, Department of Revenue Services.

Michael J. Daly, Esq., Law Offices of Michael J. Daly, LLC, Farmington, CT, Chapter 7 Trustee.

MEMORANDUM OF PARTIAL DECISION AND ORDER RE: MOTION FOR DETERMINATION OF TAX LIABILITIES

LORRAINE WEIL, Bankruptcy Judge

Before the court are the following (collectively, the "Contested Matter"): (a) United States' Motion Pursuant to Rule 9014 for Determination of Both the Estate's and the Debtor's Tax Liabilities Pursuant to § 505(a)(1) and Thereafter To Authorize Their Payment from the Escrow Account and/or by the Trustee (Doc. I.D. No. 477, the "Tax Determination Motion"¹); (b) the above-referenced debtor's (the "Debtor") objection thereto (Doc. I.D. No. 487, the "Debtor's Tax Determination Objection"); (c) the United States' Motion for Partial Summary Judgment in § 505 Contested Matter To Determine Mr. Water's 2001-Year Tax Liabilities (Doc. I.D. No. 527, the "S/J Motion"); (d) Edward J. Waters' Cross-Motion for Partial Summary Judgment in § 505 Contested Matter To Determine Mr. Waters' 2001: Form 1040 Tax Liabilities (Doc. I.D. No. 534, the "S/J Cross Motion")²; and (e) the Debtor's "Second Objection": To IRS' Second Determination of 2001 Tax Liability and IRS Motion for Partial Summary Judgment (Doc. I.D. No. 538, the "Second Objection"). The court has jurisdiction over the Contested Matter as a core proceeding pursuant to 28 U.S.C. §§ 157 and 1334, 11 U.S.C. § 505(a)(1)³ and that certain Order dated September 21, 1984 of this District (Daly, C.J.).⁴ I. BACKGROUND

As this court has noted previously, since 1991 the Debtor has filed five title 11 cases (including this case).⁵ Throughout those cases, there have been two leitmotifs: saving the Debtor's home located at 40 Swift's Lane, Darien, Connecticut (the "Property") from foreclosure of a mortgage (the "Mortgage") thereon; and dealing with the Debtor's individual state and/or federal tax liabilities. Those two themes now have converged to produce (in one way or another) the instant disputes with respect to the Debtor's and the former chapter 11 estate's (the "Estate") respective federal tax liabilities for the 2001 tax year.

This case originally was filed as a chapter 13 case on December 19, 1997. This case was converted to a case under chapter 11 by order dated July 16, 2001. (See Doc. I.D. No. 181.) The Debtor served as debtor in possession⁶ during the chapter 11 phase of the case. This case then was converted (on motion of the Debtor) to a case under chapter 7 by order dated March 10, 2004. (See Doc. I.D. No. 413.) Michael J. Daly was appointed as the chapter 7 trustee (the "Trustee").

During the chapter 13 phase of the case, the Debtor, the IRS and the Connecticut taxing authority (the "DRS"), among others, entered into a certain Stipulation "So Ordered" by this court on July 16, 2001. (See Doc. I.D. No. 180, the "Stipulation.") The Stipulation was intended (at least in part) to settle the IRS' motion to convert the case to chapter 7 (Doc. I.D. No. 127, the "IRS Motion To Convert"), a motion supported by the DRS (see Doc. I.D. No. 160).⁷ The Stipulation contemplated (among other things), the aforesaid conversion of this case to chapter 11 and, subsequently, a sale of the Property relatively promptly postconversion.⁸ The Debtor filed a motion (Doc. I.D. No. 204, the "Sale Motion") on August 21, 2001 (during the chapter 11 phase of the case) to sell the Property free and clear of liens for $2.075 million in cash consideration pursuant to an Agreement for Sale of Real Estate (annexed to Doc. I.D. No. 215, the "Sale Contract"). That motion was approved by an order (Doc. I.D. No. 215, the "Sale Order") entered on September 6, 2001. The sale (the "Sale") of the Property closed on October 26, 2001. As explained more fully below, certain deductions were made from Sale proceeds⁹ (including for unpaid real property taxes, the "Property Taxes"),¹⁰ and the balance of the Sale Proceeds was paid in respect of the Mortgage. As contemplated by the Stipulation, certain of the Mortgage proceeds are now on deposit in an escrow account (the "Escrow") awaiting distribution pursuant to further order of the court.¹¹

While the case was in chapter 13, only a single taxable entity existed: the Debtor. See 15 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ TX3.02[1][c] (15 ed. rev. 2007) ("Collier on Bankruptcy"). However, conversion of the case to chapter 11 caused two taxable entities to exist: the Debtor individually; and the Estate. See 26 U.S.C. § 1398; see also Collier on Bankruptcy ¶ TX3.02[1][b]. When the Debtor filed the Estate's 2001 fiduciary tax return, he charged the gain on the Sale to the Estate which produced a gain tax liability for the Estate in the approximate amount of $281,000.00. When the Debtor filed his individual ("Second Amended") tax return for 2001 (the "Personal Return"), he reported "foreign wages" in the amount of $1,356,340.00. On that same amended return, the Debtor (a) took as business expenses on his Schedule C ("Profit or Loss from Business"¹²) $1,424,042.00 in Mortgage interest (the "Mortgage Interest") paid from the Sale Proceeds and $200,000.00 for certain "legal and professional services" (the "Professional Fees") discussed more particularly below and (b) reported the payment of the Property Taxes in the amount of $124,793.00 on his Schedule A as an "itemized deduction." (See Doc. I.D. No. 538, Exhibit 1.) The IRS issued a notice of deficiency (dated February 22, 2005, the "Deficiency Notice") with respect to the Personal Return disallowing the adjustments/deduction (as the case may be) for the Mortgage Interest, the Property Taxes and the Professional Fees. (See Doc. I.D. No. 487, Exhibit II.)

The IRS filed the Tax Determination Motion on September 9, 2005 again challenging the Debtor's treatment of the Mortgage Interest, the Property Taxes and the Professional Fees on the Personal Return,¹³ and the Debtor filed the Debtor's Tax Determination Objection on April 10, 2006, again claiming the propriety of his treatment of those items on the Personal Return on various theories including the theory that the IRS should be barred from challenging some or all of such items on the theories that the IRS allegedly committed "fraud on the court" in connection with the conversion of this case from chapter 13 to chapter 11 and/or should be equitably (or judicially) estopped from challenging those items on similar grounds (all three grounds, collectively, the "Affirmative Defense").¹⁴

The IRS filed the S/J Motion with respect to the proper treatment of the Mortgage Interest, the Property Taxes and (now only certain of) the Professional Fees. The Debtor has filed the S/J Cross Motion and the Second Objection asserting the propriety of his treatment of all three items on the Personal Return (or the estoppel of the IRS from contesting the same). The parties have complied with Local Rule 56 of the District Court, oral argument has been had and the matter is ripe for the decision set forth below.

II. SUMMARY JUDGMENT STANDARD

"Summary judgment is appropriate only if the pleadings and submissions . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." The Andy Warhol Foundation for Visual Arts, Inc. v. Hayes (In re Hayes), 183 F.3d 162, 166 (2d Cir. 1999). See also Fed. R. Civ. P. 56(c) (made applicable here by Fed. R. Bankr. P. 7056). The movant bears the burden of establishing the absence of any genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986) ("[T]he burden on the moving party may be discharged by `showing' . . . that there is an absence of evidence to support the nonmoving party's case."). The court must view all ambiguities and draw all reasonable inferences in the light most favorable to the nonmovant. See Novak v. Blonder (In re Blonder), 246 B.R. 147, 150 (Bankr. D. Conn. 2000) (Krechevsky, J.). Ultimately, the role of the court is "not . . . to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

III. FACTS AS TO WHICH THERE IS NO GENUINE ISSUE

The court finds and/or concludes that there is no genuine issue of fact with respect to the following (the "Uncontested Facts"):¹⁵

1. At the beginning of 2001, the Property was subject to the Mortgage held by Alaska Seaboard Partners Limited Partnership ("Alaska Seaboard"). The Debtor had not reaffirmed his personal liability on the Mortgage pursuant to Bankruptcy Code § 524(c) in the 1991 Case in which he had received the Discharge. (Doc. I.D. Nos. 529 ¶ 1, 535 at 3.)

2. At all relevant times, the Debtor was the sole shareholder, sole Director, sole employee, chairman, President and CEO of an offshore entity called Cape & Islands Investment Company Limited ("CIIC"). (Doc. I.D. Nos. 529 ¶ 2, 533 ¶ 2.)

3. CIIC was formed under the laws of the Commonwealth of the Bahamas for the purpose of international investment banking. CIIC had a British Virgin Islands subsidiary with which it was merged in 1998. After the merger, CIIC continued to operate under the same name under the laws of the Territory of the...