Stoltz v. U.S., 104CV00625SEBVSS.

Decision Date17 January 2006
Docket NumberNo. 104CV00625SEBVSS.,104CV00625SEBVSS.
Citation410 F.Supp.2d 734
PartiesMark B. STOLTZ, Plaintiff, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — Southern District of Indiana

Alan J. Irvin, Peter H. Donahoe, Hill Fulwider McDowell Funk & Matthews, Indianapolis, IN, for Plaintiff.

Stephen Tancill Lyons, U.S. Department of Justice, Washington, DC, Jeffrey L. Hunter, United States Attorney's Office, Indianapolis, IN, for Defendant.

ENTRY DENYING PLAINTIFF STOLTZ'S MOTION FOR SUMMARY JUDGMENT AND GRANTING DEFENDANT UNITED STATES OF AMERICA'S MOTION FOR SUMMARY JUDGMENT

BARKER, District Judge.

This matter comes before the Court on Plaintiff's and Defendant's Cross-Motions for Summary Judgment on Plaintiff Mark B. Stoltz's ("Stolz") claim for recovery of federal income tax and interest erroneously assessed and collected by Defendant, the United States of America ("the Government"), as alleged in Plaintiff's Complaint of April 6, 2004. Specifically, Stoltz contends that he was a victim of theft and is therefore entitled to a theft loss deduction under Internal Revenue Code ("I.R.C.") § 165, 26 U.S.C.A. § 165. According to Stoltz, the theft occurred when he was fraudulently induced to guarantee a $300,000 loan to a former friend and colleague's company. The Government asserts that I.R.C. § 166 (not § 165) applies. Section 166's corresponding regulations, Treas. Reg. § 1.166-9, provide that guarantee payments are deductible under the conditions set forth in that provision or not at all. The outcome of this case is determined on the basis of whether I.R.C. § 165 or § 166 applies to Plaintiff's situation. The Court, having fully considered the parties' arguments, for the reasons discussed below DENIES Plaintiff's Motion for Summary Judgment and GRANTS Defendant's Motion for Summary Judgment.

Factual Background

Stoltz filed an Amended Return and Claim for Refund with the I.R.S. on August 23, 2001, pursuant to which he sought to deduct a theft loss in the amount of $327,165.00 from his 2000 individual income tax return. Compl., ¶¶ 5, 19. Based on this deduction, Stoltz claimed reimbursement of an overpayment of federal income tax for the year 2000 in the amount of $94,960.00. Id. The facts giving rise to Stoltz's Claim for Refund are set forth below.

Stoltz's Relationship with Scott Pounds

Stoltz met Scott Pounds ("Pounds") in August 1987 when they were both employed at Merrill Lynch. Deposition of Mark B. Stoltz, p. 22, lines 7-15 [hereinafter Stoltz Depo.]. Stoltz had a friendly relationship with Pounds during the approximately two years they worked together; Stoltz was Pounds's supervisor. Stoltz Depo., p 23, lines 16-25; p. 24, lines 1-9. They maintained their relationship both personally and professionally after Pounds left Merrill Lynch in late 1989. Id. at p. 24, lines 5, 6, 17-19; p. 29, lines 7-19.

After leaving Merrill Lynch, Pounds formed a car sales and leasing business called Mid-American Leasing, Inc. d/b/a Lexington Leasing ("Mid-American"). Deposition of Scott Pounds, pp. 19-20, 23 [hereinafter Pounds Depo.]. Because of their friendship, Stoltz wanted to help Pounds succeed in his new business and from time to time would lend his assistance. Stoltz Depo., p. 29, lines 17-18; p. 30, lines 1-9. For example, on one occasion, Stoltz agreed to personally guarantee a loan to Pounds's business by Resort Condominiums International ("RCI"). Id. at p. 30. Stoltz, Pounds, and two others each personally guaranteed $125,000 of a $500,000 loan from RCI.1 Id. Stoltz also helped Pounds borrow money from Stoltz's family members. Id. at 30, 41. Stoltz would in addition refer family, friends, and business associates to Pounds to purchase off-lease vehicles. Stoltz Depo. p. 41, 43. Stoltz provided this financial assistance and support to Pounds as a friend. Id. at 29. Stoltz was never an owner of or investor in Pounds's businesses; he simply loaned the company money. Id. at p. 35; p. 159, lines 23-25; p. 160, lines 1-4. In August of 1998, though Stoltz was not financially involved with Pounds at the time, Stoltz was again approached by Pounds to lend Pounds money. Stoltz Depo., pp. 35.

Loan and Guaranty Transaction

In August of 1998, Pounds asked Stoltz to loan $300,000 to Mid-American. Stoltz Depo. at pp. 44, 45. According to Stoltz, Pounds said that he was in trouble and needed some money but only for about 90 days, because his stepfather was going to make a gift of money to him at the end of the year. Id. at p. 45, lines 2-6. Stoltz testified that Pounds told him that the gift from his father had already been discussed, planned and scheduled, that this gift was going to be made annually, and that the only question was whether Pounds would receive the money at Thanksgiving or Christmas of 1998. Stoltz Depo., p. 178, lines 2-12. Pounds also told Stoltz that his business generally was not in bad financial shape. Pounds Depo., p. 115, lines 1-7. Pounds believes that he explained to Stoltz at the time that he needed the loan to purchase some vehicles. Pounds Depo., p. 112, lines 23-25; p. 113, lines 1-4. Stoltz, who recently had gone through a divorce which left him financially weakened, refused Pounds's request to borrow money from him personally. Stoltz Depo., pp. 45, 47.

However, Stoltz was aware that a former client of his, one Mr. Kinzel2 ("Kinzel") had a business that frequently sought short-term investment opportunities. Id. at 47-48. Kinzel's business, Indiana School Pictures, Inc. ("Indiana Pictures"), collected pre-payments from students for school photographs and Kinzel would attempt to find ways to invest this cash during the short term between his receipt of the payments and the delivery of the product. Id. Stoltz thus suggested to Pounds that he contact Kinzel regarding a possible loan. Id. at 48. Stoltz and/or Pounds contacted Kinzel to see if Indiana Pictures would be willing to make such a loan, and Indiana Pictures eventually agreed, but only on one condition: Stoltz would have to personally guarantee to repay the loan from Kinzel/Indiana Pictures in the event Mid-American and/or Pounds did not. Stoltz Depo. pp. 44-50, 52-54, 58-63. According to Stoltz, Pounds tearfully pleaded with him to sign a guaranty, telling Stoltz that Pounds's children would grow up without a father if Stoltz did not guarantee repayment of the loan; Stoltz took this statement to mean that Pounds was in imminent danger of being physically harmed. Id. at p. 54, lines 14-19; p. 154, lines 17-20. Stoltz testified that Pounds had told him that he (Pounds) had borrowed money from bad people who were not going to take kindly to a late payment, suggesting that he was in debt to loan sharks who would harm him if the debt was not paid. Id. at p. 58, lines 6-19. Stoltz believed Pounds because Pounds seemed desperate and scared. Id. at p. 62, lines 1-2; p. 158, lines 2-5. Furthermore, these statements did not seem implausible to Stoltz because he knew that Pounds liked to gamble in Las Vegas where one might encounter such people to loan him money. Id. at p. 58, lines 21-25; p. 59, lines 1-2. Although there is some disagreement as to what Pounds exactly said to Stoltz, there is no dispute that Stoltz eventually acquiesced in Pounds's pleas and agreed to guarantee the loan from Indiana Pictures.

Kinzel and Stoltz, in concert with Kinzel's attorney and Pounds, drew up the detailed terms of the loan. Stoltz Depo. pp. 65-66. As a result of those negotiations among Stoltz, Kinzel (on behalf of Indiana Pictures) and Pounds (on behalf of Mid-American), Indiana Pictures lent Mid-American $300,000 on October 12, 1998, with Stoltz and Pounds, both individually and as president of Mid-American, guaranteeing repayment of the loan. Under the terms of the loan, Mid-American was to pay Indiana Pictures 12% interest per annum up to December 31, 1998, the date the loan was due to be repaid, and 18% interest per annum thereafter until the loan was repaid. The proceeds from the loan were to be used exclusively in Mid-American's business and Pounds stated at the time the loan was made that he intended to repay it. Pounds Depo., pp. 82-83.

Stoltz agreed to make the guarantee as a personal favor to Pounds. Stoltz did not provide this guaranteed repayment of the loan and the note in connection with Stoltz's business, (Pl.'s Response to U.S.'s First Requests for Admissions to Pl., Request No. 1), nor did Stoltz give his guarantee with the intention of making a profit. Id., Request No. 2. Moreover, Stoltz did not expect or ever receive any consideration for agreeing to act as a guarantor of Pounds and his business on the loan. Stoltz Depo., p. 164, lines 24-25; p. 165, lines 1-5.

In early 1999, Indiana Pictures attempted to collect the amount due from the loan to Mid-American. It was unable to do so and thus Indiana Pictures, through Kinzel, turned to Stoltz to make good on his guarantee. To discharge his obligations as a guarantor of the note, Stoltz purchased the note from Indiana Pictures by paying the unpaid principal balance and all interest due in the amount of $311,500 on January 22, 1999. Compl., ¶ 14. Indiana Pictures assigned the note to Stoltz. Stoltz Depo., pp. 90-91.

Collection Efforts

In late January of 1999, Stoltz engaged attorney Frederic C. Sipe ("Sipe"), who had also been Indiana Pictures's counsel, to collect on the note from Mid-American and Pounds. Stoltz Depo. at p. 93, lines 7-13. Stoltz filed suit against Pounds and his business on February 11, 1999, to recover the amount paid to Indiana Pictures on his guarantee of the note. Id. at p. 94, lines 2-10. Stoltz obtained a judgment against Pounds on June 11, 1999, for $300,000 plus interest and $8,000 in costs and fees, and, following the expiration of the time for an appeal, instituted proceedings supplemental to judgment during the Fall of 1999. Id. at 35. In addition, Attorney Sipe contacted the Boone County prosecutor on Stoltz's behalf to report Pounds's...

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