Levin v. United States
| Decision Date | 13 September 2017 |
| Docket Number | Civil Action No. PX 15–1880 |
| Citation | 302 F.Supp.3d 707 |
| Parties | Myron S. LEVIN, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Maryland |
David A. Carris, Law Office of David A. Carris, Bethesda, MD, for Plaintiff.
Kyle L. Bishop, Vassiliki Eliza Economides, Department of Justice, Washington, DC, for Defendant.
Paula Xinis, United States District JudgePending in this federal income tax refund suit is Defendant United States of America's ("United States") Motion to Dismiss Plaintiff Myron S. Levin's ("Levin") Complaint, or in the alternative, for summary judgment against Levin. Also pending is Levin's cross-Motion for Summary Judgment against the United States. The issues are fully briefed, and the Court now rules pursuant to Local Rule 105.6 because no hearing is necessary. For the reasons stated below, the Defendant's motion to dismiss is granted.
In 1994, Plaintiff Myron S. Levin ("Levin") was a limited partner in the Maryland limited partnership, PCC Holdings Limited Partnership ("PCCH"). ECF No. 1 at 2. PCCH had only one other limited partner, Levin's brother, Lawrence Levin.
PCCH itself was a limited partner of another partnership entitled Presidential Corporate Center Associates, L.P. ("Presidential"). ECF No. 1 at 2. Presidential's only other partner was a company named THREA Associates, LP (THREA). Presidential was in the business of developing real property located in Prince George's County, Maryland. ECF No. 23 at 1.
After an economic downturn in the real estate market, Levin was "no longer financially able to participate" in PCCH. ECF No. 23 at 2. As a result, in May 1994, PCCH agreed to exchange its entire interest in Presidential to THREA, and THREA agreed to assume the entirety of PCCH's share of Presidential's liabilities (the "Transaction"). ECF No. 23 at 2. As part of the abandonment of this partnership interest, Levin was discharged from some unspecified "personal guarantees." ECF No. 25–6 at 4. THREA did not provide PCCH or Levin any cash or other assets in exchange for this transaction. ECF No. 23 at 2.
Levin filed a joint federal income tax return for the tax year 1994 with the Internal Revenue Service ("IRS"). ECF No. 23 at 2.2 In his tax return, Levin reported no tax liability specifically attributable to "his exchange of his partnership interest in PCC Holdings." ECF No. 23 at 2. Levin reported a net operating loss of $5,359,579 on his tax return. ECF No. 23 at 2. PCCH's return noted that Levin made a "capital contribution" to the partnership of $3,330,338. ECF No. 23 at 2. PCCH further indicated on its tax return that Levin had a negative capital account balance of $3,330,338 prior to the PCCH transfer of its interest in Presidential to THREA. ECF No. 23 at 2–3. After the Transaction, Levin's capital account balance in PCCH equaled zero. Id.
In 1998, the IRS conducted a partnership audit of PCCH pursuant to the Tax Equity and Fiscal Responsibility Act of 1982, 26 U.S.C. §§ 6221 et seq. ("TEFRA"). ECF No. 23 at 3. Levin's brother served as the Tax Management Partner (TMP) of PCCH for the audit. ECF No. 23 at 3; ECF No. 25–6 at 11. The IRS and the TMP subsequently reached a settlement wherein the TMP agreed that PCCH erred in treating the Transaction as a cancellation of indebtedness rather than a capital gain "equivalent to each partner's negative account balance as of December 31, 1994." ECF No. 23 at 3.
On or about January 20, 1998, the IRS issued a Form 886–A Explanation of Items to the partnership which stated that PCCH should have reported the sale of its partnership interest in Presidential as a "gain," and not as a "capital contribution" from both of its partners on its 1994 partnership tax return. ECF No. 23 at 2; see also Explanation of Items, ECF No. 23–4 at 2. On August 25, 2000, the IRS assessed a $916,065 federal income tax against Levin as a result of the audit, reasoning that Levin had realized a gain from PCCH's sale of its interest to Presidential. ECF No. 23 at 4. The IRS did not issue a Statutory Notice of Deficiency. Id.
Between 2012 and 2014, Levin paid a total of $2,585,056.80 to the United States for the tax debt he owed for the 1994 income tax year. ECF No. 23 at 4. On March 21, 2014, Levin filed a Form 1040X claim with the IRS in Kansas City, Missouri seeking a refund of the federal income tax and interest he paid for the tax year 1994. Id. On June 10, 2014, the IRS confirmed the filing but disallowed Levin's claim. Id.
On June 25, 2015, Levin filed the instant Complaint against the United States asserting that the IRS's characterization of the income from the 1994 transaction was erroneous. ECF No. 1. Levin argues that the IRS should have characterized the Transaction as "discharge-of-indebtedness income," instead of a capital gain. ECF No. 25–6 at 13. Had the transaction been properly characterized, Levin now argues, the IRS would be required to determine Levin's solvency during the subject year on the partner-level because the judicially created "insolvency exception" allows an insolvent taxpayer to avoid recognizing a discharge of debt as income. ECF No. 25–6 at 13. See, e.g. , Babin v. C.I.R. , 23 F.3d 1032, 1035 (6th Cir. 1994) (citing Gershkowitz v. Commissioner , 88 T.C. 984, 1005, 1987 WL 49310 (1987) ) ("Under the insolvency exception, "a debtor will not recognize income under section 61(a)(12) if he is insolvent following the discharge of indebtedness."). This process would, in turn, require the issuance of an "affected items statutory notice of deficiency." ECF No. 25–6 at 13. Because Levin was given no such notice, he contends that he has jurisdiction to challenge the IRS determination. ECF No. 25–6 at 13. Levin seeks reimbursement of the federal income tax he paid for the 1994 tax year in the amount of $2,585,056.00 and pre- and post-judgment statutory interests from the initial date from which he first paid that amount. ECF No. 1 at 5. Levin also seeks reimbursement for the costs of bringing this action and any other relief the Court deems appropriate. ECF No. 1 at 5.
On February 10, 2017, the United States moved to dismiss the Complaint under Rule 12(b)(1) for lack of subject matter jurisdiction, or alternatively for summary judgment pursuant to Rule 56. The United States argues that this Court lacks subject matter jurisdiction under § 7422(h) to revisit the characterization of income as to PCCH because it was a partnership level determination and a product of the IRS' settlement with the TMP. ECF No. 52 at 19.
In response, Levin filed a cross-motion for summary judgment on March 4, 2017. ECF No. 25. Levin acknowledges that his brother, acting as TMP for PCCH, settled with the IRS, and that settlement characterized the Transaction as capital gain. ECF No. 23 at 3. Levin nonetheless argues that because he did not participate in this audit, he is not bound by its findings. ECF No. 23 at 3. Levin contends that his brother "did not adequately communicate to [him] the particulars of the case and reached a settlement of it in a fashion that benefitted [Levin's brother] most." ECF No. 24–5 at 10. Neither Levin nor the United States has produced a copy of the settlement agreement. See ECF No. 24–1 at 13.
Defendant's motion to dismiss for lack of subject matter jurisdiction is governed by Rule 12(b)(1). Generally, "questions of subject matter jurisdiction must be decided " ‘first, because they concern the court's very power to hear the case.’ " Owens–Illinois, Inc. v. Meade , 186 F.3d 435, 442 n.4 (4th Cir.1999) (quoting 2 James Wm. Moore, et al., Moore's Federal Practice § 12.30[1] (3d ed.1998) ). However, the plaintiff always bears the burden of proving that subject matter jurisdiction properly exists in federal court. See Evans v. B.F. Perkins Co., a Div. of Standex Int'l Corp. , 166 F.3d 642, 647 (4th Cir. 1999). When a party desires to proceed in a federal court, it "must allege and, when challenged, must demonstrate the federal court's jurisdiction over the matter." Home Buyers Warranty Corp. v. Hanna , 750 F.3d 427, 432 (4th Cir. 2014) (quoting Strawn v. AT & T Mobility LLC , 530 F.3d 293, 296 (4th Cir.2008) ). On a Rule 12(b)(1) motion, the court "may consider evidence outside the pleadings" to help determine whether it has jurisdiction over the case before it. Richmond, Fredericksburg & Potomac R.R. Co. v. United States , 945 F.2d 765, 768 (4th Cir. 1991) ; see also Evans , 166 F.3d at 647. The court should grant such a motion "only if the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law." Richmond , 945 F.2d at 768.
The viability of Levin's claims depend on the application of the 1982 Tax Equity and Fiscal Responsibility Act to his case. An overview of the statutory scheme, therefore, is warranted. Under the Tax Code, a partnership is treated as a conduit through which income passes to its partners, who are then responsible for reporting their pro rata share of tax on their individual income tax returns. 26 U.S.C. § 706. Before Congress enacted the Tax Equity and Fiscal Responsibility Act of 1982, 26 U.S.C. §§ 6221 et seq. ("TEFRA"), determining each partner's individual tax obligation was a tedious and idiosyncratic process. TEFRA was created to provide a "single unified procedure for determining the tax treatment of all partnership items at the partnership level, rather than separately at the partner level." Keener v. United States , 551 F.3d 1358, 1361 (Fed. Cir. 2009) (quoting In re Crowell , 305 F.3d 474, 478 (6th Cir. 2002) ). TEFRA thus established a "partnership level" proceeding which allows the IRS to adjust items (e.g., deductions for business losses included on the partnership's' informational tax return) at a singular proceeding, and subsequently assess all partners based upon the adjustment to that particular item.
TEFRA established three categories for tax items...
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