Riether v. United States

Decision Date21 June 2012
Docket NumberNos. 10–cv–0622–BRB–LAM, 11–cv–0664–BRB–LAM.,s. 10–cv–0622–BRB–LAM, 11–cv–0664–BRB–LAM.
PartiesRobert J. RIETHER and Judy Riether, Plaintiffs, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — District of New Mexico

OPINION TEXT STARTS HERE

Thomas Smidt, III, Thomas Smidt, II, Tax, Estate & Business Law, Ltd., Albuquerque, NM, Matthew Yackshaw, Day Ketterer Ltd., Canton, OH, for Plaintiffs.

Cynthia E. Messersmith, U.S. DOJ, Tax Division, Dallas, TX, for Defendant.

ORDER GRANTING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

BOBBY R. BALDOCK, Circuit Judge.

Plaintiffs Robert and Judy Riether filed these consolidated tax refund actions, seeking a refund of approximately $112,440 in taxes, interest paid, and penalty assessments for the taxable years 2003, 2004, and 2006. The larger portion of the dispute in this case involves certain non-cash charitable donations Plaintiffs made during 2001, 2003, and 2004. Plaintiffs assert the IRS incorrectly denied Plaintiffs tax deductions for these charitable contributions. As an alternative theory of recovery, Plaintiffs seek a theft loss deduction with respect to some of the property on the theory that the donee fraudulently represented it was a qualified charitable organization under Internal Revenue Code (I.R.C.) § 170(c). The amount of loss under this alternative theory is approximately $165,000. In addition, Plaintiffs challenge the Government's determinations that Plaintiffs failed to report $10,878 in self-employment tax on their 2006 return, that Plaintiffs underreported retirement distributions by $38,100, and that Plaintiffs inappropriately took a $5,980 withholding tax credit on their 2006 return. Finally, Plaintiffs challenge the Government's imposition of a substantial understatement penalty in the amount of $7,599.60 based on Plaintiffs' 2006 return. The Government filed a motion for summary judgment or, alternatively, partial summary judgment, which is now before the Court.

I.
A.

The undisputed facts are as follows.1 Plaintiff Robert Riether is a doctor of osteopathy and radiology. He and his wife, Plaintiff Judy Riether, were at one time the sole shareholders in several subchapter S corporations that provided x-ray services in the State of Ohio. These corporations were Medi Trans X–Ray Services, Orrville Diagnostic Imaging, Trans–Ohio Radiologists, and X–Ray Physicians. Plaintiffs also jointly owned New Mexico Medical Diagnostic Imaging, LLC, during the year 2006. In 2001, Plaintiffs donated a substantial amount of medical equipment from their Ohio businesses to Whitecross Medical Missions Corporation, a corporation organized under the laws of Kentucky. A genuine dispute exists as to whether Whitecross's president informed Plaintiffs that Whitecross was a charitable organization authorized to accept tax deductible donations.2

A certified public accountant, Stephen Miller, prepared Plaintiffs' tax returns for each year at issue in this case. On their 2001 tax return, Plaintiffs listed non-cash charitable contributions totaling $639,195, in addition to $33,415 in cash contributions. (Dkt. No. 49–5 at 2.) Due to income limitations, they only claimed a charitable deduction of $338,052. ( Id.) Plaintiffs attached to their return IRS Form 8283 for “Noncash Charitable Contributions.” Section A of this form applies to contributions of $5,000 or less, whereas Section B, the “Appraisal Summary,” is for contributions “of more than $5,000 per item or group.” Plaintiffs completed part of Section B, and listed their “cost or adjusted basis” in the equipment at $1,212,000. (Dkt. No. 49–6 at 1.) Part III of the Appraisal Summary requires the declaration of an appraiser stating the following: (1) he is not the donor, donee, or a party to the transaction, (2) he holds himself out to the public as an appraiser and performs appraisals on a regular basis, (3) he is qualified to make appraisals of the property being valued, and (4) the appraisal fees were not based on a percentage of the appraised property value. ( Id. at 1.) No appraiser executed this section, and Plaintiffs appraised the equipment themselves. According to Plaintiffs, “All of the values assigned to the various pieces of donated x-ray equipment and supplies were determined by researching the marketplace for used medical equipment and supplies.” Plaintiffs also assert they “conservatively valued” the equipment at “less than one-half of ... the original cost.” Plaintiffs also left blank Part IV of the Appraisal Summary, the “Donee Acknowledgement.” It requires the charitable organization to acknowledge it is a qualified charitable organization under I.R.C. § 170(c). (Dkt. No. 49–6 at 1.) Plaintiffs did, however, attach to their tax return a document on Whitecross letterhead labeled “RECEIPT” that acknowledged receipt of the equipment “detailed in Exhibit A attached hereto.” (Dkt. No. 49–6, at 3.) Exhibit A was an accurate list of the donated property.

Because Plaintiffs' income only allowed them to claim part of these contributions as deductions in 2001, they carried over $334,558 in charitable contributions to their 2002 income tax return. Plaintiffs claimed a charitable deduction of $90,252 on their 2002 returns, based on $26,905 in cash contributions during 2002 and part of the carryover from 2001. (Dkt. No. 49–8 at 2.) The IRS did not audit Plaintiffs' 2002 return, which is only relevant because of the charitable contribution amounts Plaintiffs carried over.

In 2003, Plaintiffs made another contribution of used medical equipment to Whitecross, equipment they valued at $365,610. On their 2003 tax return, Plaintiffs listed charitable cash donations of $8,965 and noncash contributions of $365,610, as well as a carryover of $271,211 from 2002. (Dkt. No. 49–9 at 2.) This time, Plaintiffs listed the contributions under Section A of IRS Form 8283, for items on which the taxpayer “claimed a deduction of $5,000 or less.” ( Id. at 3.) Plaintiffs listed their cost or adjusted basis as $730,000 and the resale value of the equipment as $365,610. ( Id.) They did not attach Section B, the Appraisal Summary, to the return, nor did the return contain any other statements by an independent appraiser. They did attach a document listing the donated items and their values, as well as a signed letter by Whitecross's president acknowledging receipt of the equipment. (Dkt. No. 49–9, at 5.) Because of income limitations, Plaintiffs only claimed a charitable deduction of $87,005 on their 2003 return, and carried over the remainder.

In 2004, Plaintiffs made a third charitable contribution. This time, they donated two 2001 Chevrolet G3500 vans, one to Cornerstone Chapel and one to Frontline Ministries. The Government does not dispute Cornerstone and Frontline were qualified to receive charitable contributions under I.R.C. § 170(c). On their 2004 tax return, Plaintiffs listed a cash donation of $2,100, a noncash charitable contribution of $29,000 for the two vans, and a carryover of $558,781. (Dkt. No. 49–10 at 2.) They attached a Form 8283, listing the cost basis of each van as $45,000 and the fair market value of each as $14,500. (Dkt. No. 49–11 at 1.) This time, Plaintiffs ensured Form 8283 was completed. They attached a letter from James McLaughlin at Skipco Financial Adjusters/Skipco Auto Auction stating each van had a retail value of $14,500 and a wholesale value of $10,200. (Dkt. No. 49–12, at 2.) Mr. McLaughlin completed a “Declaration of Appraiser” for each van. (Dkt. Nos. 49–11 at 3; 49–12 at 1.) Cornerstone and Frontline also completed the “Donee Acknowledgement” for their respective donations. ( Id.) Plaintiffs attached letters from both Frontline and Cornerstone which said they gave no goods or services in exchange for the donations. (Dkt. Nos. 49–11 at 2; 49–12 at 3.) Plaintiffs claimed a charitable deduction in the amount of $148,916 for 2004. (Dkt. No. 49–10 at 2.)

Plaintiffs' 2005 tax return, which the IRS did not audit and which is not directly at issue in this case, listed $2,075 in charitable cash contributions, and a carryover of $440,965 from the prior year. (Dkt. No. 50 at 2.) Plaintiffs took a charitable deduction of $51,457 in 2005.( Id.) Plaintiffs' 2006 tax return listed cash donations of $1,595 and a carryover of $391,583 from 2005. (Dkt. No. 50–1 at 2.) Plaintiffs claimed a total charitable deduction in 2006 of $57,852. ( Id.)

B.

All was well until Plaintiffs experienced a taxpayer's worst nightmare-an IRS audit. The IRS limited its audit to Plaintiffs' 2003, 2004, and 2006 returns. The IRS disallowed charitable deductions of $78,040 for 2003, $125,816 for 2004, and $56,257 for 2006. The IRS denied these deductions on the basis that the contributions were not made to a charitable organization as defined by § 170(c).

The IRS also determined Plaintiffs owed self-employment tax on their share of the ordinary income from New Mexico Diagnostic Imaging, LLC in 2006. The LLC's treatment of its 2006 income is somewhat confusing. First, the LLC issued Forms W–2 showing salaries or wages of $25,750 to each Plaintiff, for a total of $51,500. Plaintiffs reported $51,500 in wages on line 7 of their 2006 tax return. (Dkt. No. 50–1 at 1.) The LLC withheld federal income and FICA (self-employment) taxes from these wages, and the IRS found no fault with Plaintiff's treatment of these wages. Second, the LLC issued Plaintiffs Schedules K–1 with their distributive share of the remainder of the LLC's income. (2006 Form 1065, Dkt. No. 53–2 at 2–3.) Each Schedule K–1 showed $38,493 in income to each Plaintiff, for a total of $76,986. ( Id.) Plaintiffs reported this amount on line 17 of their 2006 Form 1040, but did not pay any self-employment tax on this income, treating it instead as if it were investment or other passive income. The IRS determined Plaintiffs were subject to $10,878 in unpaid self-employment taxes on their $76,986 distributive share of the LLC's earnings. At the same time, the IRS allowed Plaintiffs an above-the-line...

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