Roberts v. US

• Decision Date: 06 April 1990
• Docket Number: No. 86 C 9934 to 86 C 9936.,86 C 9934 to 86 C 9936.
• Citation: 734 F. Supp. 314
• Parties: W. Stewart ROBERTS, Robert G. Peters, and Reuben D. Peters, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Illinois

734 F. Supp. 314

W. Stewart ROBERTS, Robert G. Peters, and Reuben D. Peters, Plaintiffs, v. UNITED STATES of America, Defendant.

Nos. 86 C 9934 to 86 C 9936.

United States District Court, N.D. Illinois, E.D.

April 6, 1990.

John Ryan, III and William Stevens, Rooks, Pitts and Poust, Chicago, Ill., for plaintiffs.

Frederick Branding, Asst. U.S. Atty., and Philip Karter, Trial Atty., Tax Div., Justice Dept., Washington, D.C., for defendant.

MEMORANDUM OPINION AND ORDER

LINDBERG, District Judge.

The above-captioned tax refund law suits were consolidated on June 10, 1988 before Judge Ilana Diamond Rovner. They involved the plaintiffs' respective federal personal income tax returns for the tax years 1984 and 1985.

On April 29, 1988, after discovery was completed, plaintiff W. Stewart Roberts filed a motion for summary judgment on various issues with supporting affidavits and a memorandum. Plaintiffs Robert G. Peters and Reuben D. Peters filed similar motions, supporting affidavits and memoranda.

At the same time, defendant United States of America filed a motion for summary judgement, together with its local Rule 12(e) statement of undisputed facts and a memorandum in support of its motion for summary judgment.

In addition to the foregoing documents, the Chicago Board Options Exchange, Inc., filed an amicus curiae memorandum in support of plaintiff W. Stewart Roberts' motion for summary judgment on or about May 23, 1989.

On May 26, 1988, Judge Rovner transferred the cases to the Executive Committee for a referral to a magistrate, and the cases were transferred to Magistrate James T. Balog for preparation of report and recommendation on the parties' motions for summary judgment.

On September 19, 1988, Magistrate Balog issued his report and recommendation. Essentially his report recommended that defendant's motion for summary judgment on all issues be denied and that plaintiffs' motions for summary judgment on all issues be granted. Thereupon the cases were returned to the calendar of the court.

On September 28, 1988, the plaintiffs filed an objection to the report and recommendation of Magistrate Balog.

Defendant, on October 25, 1988, filed an objection to the report and recommendation of Magistrate Balog, plaintiffs filed their response to the objections of defendant to the report and recommendation. Since the issues of law and fact have been extensively examined in the report, they will not be set forth in detail here.

At the time the complaints were filed in these matters, there had been no refunds paid for the years in question. Therefore the complaints requested payment of the full amount of the refunds set forth in the amended federal income tax returns for the years in question. After the completion of the Internal Revenue Service's audits of the amended returns, which occurred during discovery, the IRS issued audit reports indicating that certain portions of requested refunds were not objected to by the IRS. Further, plaintiffs agreed to various adjustments in the audit reports. Therefore, the plaintiffs' summary judgment motions specified the items which were referred to as the "agreed issues", and requested immediate summary judgment as to the "non-objected to" amounts. On March 1, 1989, defendant indicated that partial remittances would be made as to certain portions of the requested refunds. The parties shortly thereafter filed a draft joint stipulation and consent order indicating that these concessions had been made in each of the cases and the parties agreed to entry of partial summary judgments which were entered by the court on April 24, 1989 against defendant as follows:

                R.G. Peters           -      $1,091,372.00
                Reuben D. Peters      -      $1,185,058.00
                W. Stewart Roberts    -      $   39,457.00
                

The refund balance sought by the plaintiffs, after payment of the aforesaid amounts, presently comprise the remaining amounts in controversy which are subject to the court's decision on the parties' cross-motions for summary judgment.

The amounts are:

                R.G. Peters              -      $146,081.00
                Reuben D. Peters         -      $462,628.00
                W. Stewart Roberts       -      $236,193.00
                

The primary issue presented in all three refund suits is an issue of first impression, namely whether the taxpayers are allowed under Internal Revenue Code section 1212(c) to carry back their section 1256 contract losses incurred in 1986 in commodity futures and mixed straddles (i.e., Chicago Board Options Exchange options and the stocks underlying such options) to offset section 1256 contract gains in 1984 regardless of whether or not such losses were part of their mixed straddle account elections made pursuant to Temp.Treas. Reg. section 1.109(b)-4T.

In 1985, each of the taxpayers incurred significant section 1256 contract losses. In the cases of Reuben Peters and Stewart Roberts, a portion of the section 1256 contract losses were part of their mixed straddle account elections made pursuant to Temp.Treas.Reg. section 1.092(b)-4T, and a portion of the section 1256 contract losses were not part of such elections. In the case of Robert Peters, all section 1256 contract losses reported for 1985 were losses incurred independent of any mixed straddle account election.

In conjunction with the filing of their 1985 tax returns, the three taxpayers simultaneously filed amended 1984 tax returns which carried back the excess 1985 section 1256 contract losses against their 1984 section 1256 contract gains, and according to their calculations, entitled them to significant refunds of their 1984 taxes.

Upon the filing of the amended 1984 returns, the Internal Revenue Service conducted audits of each taxpayer and determined that they were entitled to carry back any portion of their total 1985 section 1256 contract losses which were not part of their mixed straddle account election on the theory that such losses are governed by section 1.1092(b)-4T rather than section 1256 and therefore, can be carried back under section 1212(c).

There are several other issues presented in these cases, all of which are the subject of one or more summary judgment motions, to wit:

1. Reuben D. Peters and Robert G. Peters—Free credit entry issue:

Plaintiffs state that their CBOE market maker accounts were inadvertently credited by their clearing member with entries for interest. Defendant insists that these credits represent income in 1984, the year in which they were credited to plaintiffs' accounts. According to plaintiffs, no additional taxes are owed for 1984 because the credit entries were made in error and this error was discovered in 1985 and thereafter reversed.

2. Robert G. Peters—Jurisdictional challenge over section 1212(c) carryback issue:

Defendant argues that because the carryback of mixed straddle account losses has no effect on Peters' taxes for 1984 or 1985, the two years at issue in this refund suit, and he is only seeking a refund for 1984 based on other issues, the court lacks jurisdiction over this issue under 28 U.S.C. section 1346(a)(1) and 26 U.S.C. section 7422. Plaintiffs believe that since Robert G. Peters is requesting a refund for 1984, the treatment of mixed straddle carrybacks to 1984 is within the court's jurisdiction, as is the issue of a carryforward.

3. Robert G. Peters—Charitable donation:

Defendant contends that a charitable deduction claimed by Robert G. Peters in 1983 carried to 1984 was in fact a payment for a purchase at a charity auction rather than a donation. Peters contends that he did not purchase anything at the auction but only made a contribution. The issue is one of substantiation.

Finally, there were various other issues originally in controversy which have been settled by the parties during the course of this action.

As a housekeeping matter, plaintiffs object to the report and recommendation of the Magistrate on a matter relating to what appears to be a typographical error. Page 2 of the report contains the following statement: "Plaintiffs alleged that these carrybacks reduce their 1984 tax obligations to $275,650 for W. Stewart Roberts; $1,237,453 for Robert G. Peters; and $1,647,686 for Reuben D. Peters." (Emphasis added.) It is obvious that the statement is erroneous since plaintiffs alleged that the carrybacks reduced their 1984 tax obligations by the respective amounts. There being no response by the defendant, the plaintiffs' objection is sustained and the Magistrate's report and recommendation is amended accordingly.

Defendant, United States of America, objects to sections I, II, III and IV of the report and recommendation of the Magistrate in an eighteen-page statement of objections which the court has carefully considered as it has the response by the plaintiffs to defendant's objections. It appears to the court that the defendant essentially reargues the case it presented to the Magistrate and the court will not reiterate those arguments as they are more than amply set out in the report and recommendation of Magistrate Balog. After a de novo review of the record, and the memoranda of counsel, the court is satisfied that the well-reasoned report and recommendation of Magistrate Balog is in accordance with law. Defendant's objections to the report and recommendation of Magistrate Balog are overruled. The court adopts the report and recommendations of Magistrate Balog as its own; and, for the reasons set forth in his report which is attached hereto and incorporated herein by reference, the motion of the defendant for summary judgment is denied and the motions of the plaintiffs for summary judgment are granted.

REPORT AND RECOMMENDATION

JAMES T. BALOG, United States Magistrate.

This is a consolidated action for a refund of federal income taxes. Plaintiff W. Stewart Roberts claimed a refund of $275,650.00; plaintiff Robert G. Peters sought a refund of $1,237,453.00, and plaintiff Reuben D. Peters claimed a refund of $1,647,686.00, each for the 1984 tax year.

The parties...