Shnier v. United States
| Decision Date | 17 November 2020 |
| Docket Number | No. 18-1257,18-1257 |
| Parties | DAVID C. SHNIER & EVELYN Z. SHNIER, Plaintiffs, v. THE UNITED STATES, Defendant |
| Court | U.S. Claims Court |
Pro Se; Tax Refund Claim; RCFC 56; Motion for Summary Judgment; 26 I.R.C. § 1297; Passive Foreign Investment Company ("PFIC"); Taxpayer Bill of Rights ("TBOR"); 26 I.R.C. § 7803(a)(3)
David C. Shnier and Evelyn Z. Shnier, pro se, of Baltimore, MD, for plaintiffs.
Miranda Bureau, Trial Attorney, with whom were Mary M. Abate, Assistant Chief, David I. Pincus, Chief, Court of Federal Claims Section, and Richard E. Zuckerman, Principal Deputy Assistant Attorney General, Department of Justice, all of Washington, D.C.
Plaintiffs David and Evelyn Shnier bring this case challenging an Internal Revenue Service ("IRS") assessment of passive foreign investment company ("PFIC") taxes under the Internal Revenue Code ("I.R.C.") § 1297 against plaintiffs' foreign holdings. Pending before the Court are the government's motion for summary judgment and motion to dismiss, along with plaintiffs' cross-motion for summary judgment. For the following reasons, the Court GRANTS the government's motion for summary judgment, DENIES plaintiffs' cross-motion for summary judgment, and DISMISSES plaintiffs' claims for injunctive relief and fees for lack of subject matter jurisdiction under RCFC 12(b)(1).
In the 1960s, plaintiff David Shnier's "father and four uncles . . . established family trusts to share ownership of their jointly owned [Canadian] floorcovering company." Pls.' Cross-Mot. for Summ. J. and Opp'n to Def.'s Mot. for Summ. J. ( ) at 11, ECF No. 26; see Compl. at 2, ECF No. 1. After the Canada Revenue Agency issued regulatory changes making holding a corporation through trusts less advantageous, the five men created five holding companies—"one for each family"—through which they jointly owned the floorcovering company. Id. Mr. Shnier's father owned and managed one of these companies, Enshnierco. See id. A sixth holding company, Metropolitan Equities Limited, was created, and its "main assets were the buildings owned by the floorcovering company" and "the only bank account that has existed for these six holding companies . . . ." Id. "For income spreading purposes," the brothers' children and spouses were made "co-owners of the five family holding companies." Id. This led to the children "receiving" distributions from the flooring company, although no money was ever actually given to them. Pls.' Cross-MSJ at 11-12; see Compl. at 2. Rather, "their parents and [u]ncles were the actual recipients of the money." Pls.' Cross-MSJ at 12; see Compl. at 2.
Mr. Shnier immigrated to the United States from Canada in the mid-1990s. See Pls.' Cross-MSJ at 13; Compl. at 2. He became a naturalized citizen "during 2005-2007." Pls.' Cross-MSJ at 14; see Compl. at 4. In 2007, before the death of Mr. Shnier's father, "the floorcovering company was sold." Pls.' Cross-MSJ at 12; see Compl. at 2, 4. Mr. Shnier's father "made the decision on which investment management companies to use" when investing Enshnierco's portion of the proceeds from the sale, thereby transitioning the holding company's "main asset[s]" from the floorcovering corporation to passive investments, including real estate. Id.
Beginning in 2007 and continuing for several years, "including . . . 2010 and 2011," Mr. Shnier "received distributions" from the Canadian holding companies. Def.'s Mot. for Summ. J. and Mem. in Supp. ("Def.'s MSJ") at 2, ECF No. 25 (citing Compl. at 2, 10). Plaintiffs timely filed their U.S. federal income tax returns (Forms 1040) for the tax years 2007, 2010, and 2011. Id. (citing Compl. at 4). Despite receiving advice in 2007 from a Canadian accounting firm they "could be subject to U.S. tax reporting laws [such as 26 I.R.C. § 1297] with respect to those holding companies," plaintiffs did not report the distributions on their federal tax returns. Id. In late 2013, however, Mr. Shnier filed amended 2007, 2010, and 2011 tax returns while participating in the IRS's Offshore Voluntary Disclosure Program ("OVDP"). Id. at 3 (citing Compl. at 5-6). OVDP is one of several IRS "initiatives to encourage taxpayers in plaintiffs' situation to come forward voluntarily," pay their taxes and fees, and address issues creating possible "criminal and civil liability due to failure to report foreign assets or transactions." Id. Plaintiffs' amended returns included "the distributions from the Canadian holding company Metropolitan Equities Limited as income from a passive foreign investment corporation." Id. (). On 12 June 2014, the IRS informed plaintiffs' attorney at the time the agency had "preliminarily accepted" the voluntary disclosure. Def.'s MSJ at 4 (). More than one year later, on 16 July 2015, plaintiffs sent a letter to the IRS opting out of OVDP and "requesting that the casebe 'closed.'" Id. (quoting App., Ex. 10 (Letter from Jeffrey D. Baer, CPA, to Richard Vollmer, IRS (July 16, 2015))). The IRS continued to offer plaintiffs the opportunity to participate in OVDP while at the same time warning it might audit plaintiffs "under standard examination procedures" should they continue not to comply. Id. ().
On 4 April 2017, plaintiffs sent the IRS a letter "requesting appeal of the penalties assessed under § 6662." Id. at 5 (). On 28 April 2017, the IRS assessed PFIC taxes against plaintiffs, leading to payments of additional taxes, interest, and I.R.C. § 6662 penalties totaling $49,949.12, $12,115.69, and $5,228.21 for 2007, 2010, and 2011, respectively. Id. at 4-6 (). Eight months later, on 28 December 2017, the IRS received a second letter from plaintiffs protesting the PFIC income tax assessments. Id. at 6 (). The IRS "treated these letters as informal refund claims" and refunded plaintiffs' § 6662 penalties as such. Def.'s MSJ at 6 (citing Compl. at 6). At the same time, the IRS rejected the tax assessment protest. Id. (citing Compl. at 6). Plaintiffs appealed the IRS's decisions through its procedures, which "concluded in May 2018." Compl. at 2 (). Plaintiffs explain their IRS appeals "were a result of [Mr. Shnier's] participation in the IRS Offshore Voluntary Disclosure Program (OVDP) and beyond . . . ." Id.
Following the failure of their tax assessment protest, plaintiffs filed a complaint in this Court on 21 August 2018 to recover their PFIC income taxes paid for 2007, 2010, and 2011. See id. at 5. Plaintiffs argued "the IRS has miss-applied [sic] the laws of" PFICs to their ownership of Canadian companies. Id. at 2. Plaintiffs requested $99,706 in "back taxes, penalties, and interest which were not refunded through our IRS Appeals claim." Id. Plaintiffs also sought equitable relief consisting of "50-percent of the legal and accounting fees, which have been incurred to date through our efforts to report these Canadian ancestral holdings as PFIC's [sic]," along with injunctive relief "order[ing] the IRS . . . desist from classifying as PFICs" their companies. Id. On 26 February 2019, the government answered, "[d]en[ying] that the IRS has misapplied any laws." Answer at 2, ECF No. 12. The case was reassigned to the undersigned Judge on 29 July 2019. See Order, ECF No. 16.
On 30 August 2019, the parties filed a Joint Status Report ("JSR"), which included a separate statement from plaintiffs reporting a timeline of recent "activities and results." JSR, ECF No. 18. Plaintiffs' timeline included discovery-related events and stated plaintiffs offered a settlement proposal to the government, which the government rejected on 23 August 2019. Id. at 3. Plaintiffs subsequently moved for alternative dispute resolution ("ADR") on 3 September 2019. See Mot. for Alternative Dispute Resolution, ECF No. 19. The government consented to ADR on 17 September 2020. See Def.'s Resp. to Pls.' Req. for Alternative Dispute Resolution,ECF No. 20. The ADR proceeding was referred to Senior Judge John P. Wiese on 3 October 2019. Order, ECF No. 21. On 31 October 2019, the court held an unrecorded ADR proceeding, and it concluded ADR on the following day, 1 November 2019. Order Terminating ADR Proceedings, ECF No. 23 ().
On 9 December 2019, the government filed a motion for summary judgment. See Def.'s MSJ. In response, plaintiffs filed a cross-motion for summary judgment on 3 January 2020. See Pls.' Cross-MSJ. On 31 January 2020, the government filed a response. See Resp. to Pls.' Cross-Mot. for Summ. J. ("Def.'s Resp."), ECF No. 27. On 13 February 2020, the government filed a motion to amend its response. See Def.'s Mot. for Leave to File an Amended Resp. to Pls.' Cross-Mot. for Summ. J. ("Def.'s Amended Resp."), ECF No. 28. Plaintiffs filed their reply on 14 February 2020. See Pls.' Resp. to Def.'s Resp. to Pls.' Cross-Mot. for Summ. J. and...
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