Pryde v. United States, 15-878T
| Decision Date | 15 December 2017 |
| Docket Number | No. 15-878T,15-878T |
| Parties | MARC H. PRYDE and LISA R. PRYDE, Plaintiffs, v. THE UNITED STATES, Defendant. |
| Court | Court of Federal Claims |
NOT FOR PUBLICATION
I.R.C. § 172; Net Operating Loss; Carryback; Theft Loss Deduction; I.R.C. § 165; Bad Debt Deduction; I.R.C. § 166; RCFC 56; Res Judicata; Judicial Notice.
Brian G. Isaacson, Attorney of Record, Isaacson Law Firm, Seattle, WA, for plaintiffs.
Brian James Sullivan, Trial Attorney, Jason S. Selmont, Trial Attorney, Court of Federal Claims Section, Robert J. Higgins, Of Counsel, David I. Pincus, Chief, Court of Federal Claims Section, David A. Hubbert, Acting Assistant Attorney General, Tax Division, United States Department of Justice, Washington, DC, for defendant.
In this tax refund action, plaintiffs, Marc H. Pryde and Lisa R. Pryde, seek to recover a tax refund in the amount of $876,352.00 in connection with certain financial losses associated with several defaulted loans, based upon the bad business debt deduction under Internal Revenue Code ("I.R.C.") § 166(a); the theft loss deduction under I.R.C. § 165(c); Revenue Ruling 2009-9; and the safe-harbor provision set forth in Revenue Procedure 2009-20. See generally Compl. The parties have filed cross-motions for summary judgment on the issue of whether plaintiffs are entitled to a tax refund based upon the aforementioned provisions, pursuant to Rule 56 of the Rules of the United States Court of Federal Claims ("RCFC"). See generally Pl. Mot.; Def. Mot. For the reasons discussed below, the Court DENIES plaintiffs' motion for summary judgment, or, in the alternative, partial summary judgment and GRANTS-IN-PART the government's cross-motion for summary judgment.
In this tax refund action, plaintiffs, Marc H. Pryde and Lisa R. Pryde, seek to recover a tax refund in the amount of $876,352.00 in connection with certain financial losses associated with several defaulted loans, based upon the bad business debt deduction under I.R.C. § 166(a); the theft loss deduction under I.R.C. § 165(c); Revenue Ruling 2009-9; and the safe-harbor provision set forth in Revenue Procedure 2009-20. See generally Compl. Plaintiffs claimed the bad business debt and theft loss deductions in tax year 2009, and they seek to carryback the unused deductible losses to 2004. Id. ¶ 5. Plaintiffs also seek to carryforward any remaining deductible losses to 2005. Id.
And so, plaintiffs seek tax refunds in the amounts of $36,000.00 for tax year 2009; $85,400.00 for tax year 2004; and $754,952.00 for tax year 2005.2
As background, plaintiffs are a married couple and they reside in Washington State. Id. ¶ 6. The Pryde family has been involved in the real estate development business in the Seattle area for several decades. Id.
¶¶ 13-16. The father of Marc Pryde, Harry Pryde, began work in the real estate industry in the 1940s. Def. Ex. 1 at 6. In the late 1980s, Marc Pryde joined the family business as the general counsel for the Pryde Corporation. Def. Ex. 2 at 4.
In addition to developing real estate, the Pryde family occasionally lent money to others. Compl. ¶¶ 21-22. Specifically relevant to this tax refund dispute, Marc Pryde made several loans to Michael R. Mastro—a former Seattle-based real estate developer, lender, and investor. Id.; see also Compl. Ex. D.
Specifically, on February 3, 2006, Marc Pryde loaned $5 million to Mr. Mastro. Compl. ¶¶ 1, 22. Mr. Mastro made payments to reduce the $5 million principal balance of this loan down to $2 million. Id. ¶¶ 2, 31.
On May 23, 2008, Marc Pryde made another loan to Mr. Mastro in the amount of $400,000.00. Id.
¶ 2. In addition, on December 2, 2008, Marc Pryde made another loan to Mr. Mastro in the amount of $2 million (the February 2, 2006; May 23, 2008; and December 2, 2008 loans, collectively, the "Mastro Loans"). Id.
As of December 2, 2008, the outstanding principal balance of the Mastro Loans was $4,400,000.00. Id.
Mr. Mastro also issued an unsecured promissory note to Marc Pryde in connection with these loans. See generally Compl. Ex. A. Under the terms of the Mastro Loans, the proceeds of the loans were to be payable on demand. Compl. Ex. A at 1; Compl. Ex. D at 1; Def. Ex. 2 at 26-27. Between 2006 and 2009, Mr. Mastro made monthly interest payments to Marc Pryde in connection with the Mastro Loans. See Def. Mot. at 6; Def. Ex. 2 at 26, 42. To that end, Mr. Mastro has paid Marc Pryde more than $1.3 million in interest in connection with the Mastro Loans. Def. Mot. at 6; Def. Ex. 1 at 46. See generally Def. Exs. 5, 19.
The Seattle real estate market rapidly deteriorated during the latter part of 2008 through mid-2009, as a result of the Nation's financial crisis. See Def. Mot. at 7; Def. Ex. 8 at 7; Def. Ex. 16 at 7. See generally Def. Ex. 17. As a result, the demand for real estate shriveled and property values plummeted. Def. Mot. at 8; Def. Ex. 8 at 7, 14; Def. Ex. 16 at 7. See generally Def. Ex. 17.
These adverse conditions crippled Mr. Mastro's properties located in the Seattle-area real estate market. Def. Mot. at 8. And so, by March 2009, Mr. Mastro was unable to meet his bank loan payment obligations. Def. Ex. 6 at 12-13; Def. Ex. 8 at 11; Def. Ex. 9 at 20-21.
On July 10, 2009, three banks—Columbia State Bank, First Sound Bank, and Venture Bank—filed an involuntary bankruptcy petition against Mr. Mastro in the United States Bankruptcy Court for the Western District of Washington (the "Bankruptcy Proceedings"). Compl. ¶ 25. See generally Pl. Ex. A. In his first report to creditors in these Bankruptcy Proceedings, the bankruptcy trustee, James Rigby, stated that:
Mastro's state of insolvency did not arrive overnight. Mastro spent the time frame from at least mid 2008 through mid 2009 providing many creditors with second, third and fourth place liens against real estate property and assigning his promissory notes receivable. . . . Had the Mastro bankruptcy proceedings been filed one year earlier, prior to the assignment of significant assets to creditors and cash drawn down, there would probably have been more additional funds available for general unsecured creditors. But that is not the case.
As a result of the Bankruptcy Proceedings, Marc Pryde discovered that Mr. Mastro made allegedly fraudulent representations to convince him to make the Mastro Loans. Compl. ¶ 26. In this regard, plaintiffs maintain that the 2009 Statement of Financial Condition that Mr. Mastro provided to Marc Pryde fraudulently represented that Mr. Mastro had a positive net worth of $125,653,341.00. Id. In contrast, Mr. Mastro's Bankruptcy Schedules reported a negative net worth of $82,871,897.00 in 2009. Id. Marc Pryde filed a proof of claim for $4,422,000.00 in the Bankruptcy Proceedings on December 4, 2009. Pl. Ex. E at 1.
On October 1, 2009, the State of Washington's Department of Financial Institutions Securities Division filed a statement of charges and notice of intent to enter an order to cease and desist, to revoke exemptions, and to impose a fine against Mr. Mastro. See Compl. Ex. E at 13-14; In the Matter of Determining whether there has been a violation of the Securities Act of Washington by Michael R. Mastro, doing business as Mastro Properties, Order No. S-09-038-09-SC0l (Oct. 1, 2009). In that proceeding, the State of Washington's Department of Financial Institutions alleged that Mr. Mastro violated state securities laws by selling unregistered securities and by making untrue statements of material fact in the course of some of those sales. See Def. Mot. at 8. See generally Def. Ex. 20. On January 10, 2010, Mr. Mastro entered into a consent order with the Department of Financial Institutions and agreed to cease and desist from violating the anti-fraud section of the Securities Act of Washington and to pay a fine. Compl. ¶ 34; Def. Mot. at 8-9; Def. Ex. 20 at 17-20.
Mr. Mastro's troubles did not end, however, with this consent order. On October 25, 2012, a federal grand jury sitting in the United States District Court for the Western District of Washington returned a 43-count indictment charging Mr. Mastro and his wife withbankruptcy-related crimes.3 See Coml. Ex. H; see also United States v. Mastro, No. CR12-320 JCC (W.D. Wash. filed Oct. 25, 2012). The superseding indictment, filed November 7, 2012, provides, among other things, that:
Beginning on a date uncertain, but in or about 2008, and continuing through at least in or about August 2011, within the Western District of Washington and elsewhere, MICHAEL R. MASTRO and LINDA A. MASTRO, and others known and unknown to the Grand Jury, knowingly and willfully devised and attempted to devise, and executed and attempted to execute, a scheme and artifice to defraud the Bankruptcy Court for the Western District of Washington, the Court-appointed trustee in bankruptcy, and creditors in connection with an involuntary bankruptcy proceeding filed on or about July 10, 2009, under Title 11, United States Code, In re: Michael R. Mastro, Case No. 09-16841 (the 'bankruptcy proceeding'), in that they prepared and filed and caused to be prepared and filed materially false and fraudulent documents, and made and caused to be made materially false and fraudulent representations concerning and in relation to that proceeding under Title 11, United States Code . . . .
Pl. Ex. J at ¶ 4. The superseding indictment also alleges that certain personal property—a checking account, the Mastro's home, home furnishings, and two diamond rings—were concealed during the Bankruptcy Proceedings. Id. at ¶ 5. Nearly all of the property specified in the superseding indictment has been seized and the proceeds from the sale of these items have been distributed to Mr. Mastro's unsecured creditors. See Def. Mot. at 9; Def. Ex. 16 at 8-9; see, e....
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