Taha ex rel. His Deceased Brother v. United States
| Decision Date | 01 April 2020 |
| Docket Number | No. 17-1174T,17-1174T |
| Parties | ALI TAHA, on behalf of his deceased brother and his brother's wife, Plaintiffs, v. UNITED STATES, Defendant. |
| Court | U.S. Claims Court |
Claim for tax refund; tax paid on shareholder's portion of Subchapter S corporation's income that was reported but never received by the shareholder; physical-delivery rule for refund claims; exceptions to that rale, 26 U.S.C. § 7502, not satisfied; seven-year period of limitation for business bad debt claims; 26 U.S.C. § 6511(d)(1)
Ali M. Taha, pro se, Bradenton, FL, on behalf of his deceased brother, Mohamad E. Taha, and his brother's wife, Sanaa M. Yassin, United Arab Emirates.
Elizabeth A. Kanyer, Trial Attorney, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, D.C., for defendant. With her on the briefs were Richard E. Zuckerman, Principal Deputy Assistant Attorney General, Tax Division, and David I. Pincus, Chief, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, D.C.
Plaintiffs filed this action against the United States ("the government") seeking a refund of federal income taxes from the 2002, 2003, and 2004 tax years. Following dismissal by this court of plaintiffs' claims for lack of subject-matter jurisdiction and a subsequent decision by the United States Court of Appeals for the Federal Circuit affirming dismissal for tax years 2002 and 2004 and remanding respecting tax year 2003, at issue in this remand is plaintiffs' tax refund claim for the 2003 tax year. See generally Taha v. United States, 137 Fed. Cl. 462 (2018) ("Taha I"), aff'd in part, vacated in part, and , 757 Fed. Appx. 947 (Fed. Cir. 2018) ("Taha II"). The Federal Circuit directed this court on remand to resolve three material factual disputes pertaining to plaintiffs' 2003 refund claim; (1) whether plaintiffs had properly filed a tax refund claim for tax year 2003, and if so, (2) whether this refund claim was timely, and (3) whether the IRS disallowed the 2003 claim. Taha II, 757 Fed. Appx. at 952. To address these issues, the court held a two-day trial in Tampa, Florida on December 9 and 10, 2019. Post-trial briefing was completed on March 23, 2020, and the case is now ready for disposition.
Plaintiffs, Mohamad Taha and his wife, Sanaa Yassin, acting through Ali Taha as their representative, initially brought suit seeking a tax refund of $14,177 for federal income tax paid during the 2002 and 2003 tax years. See generally Transfer Complaint ("Compl."), ECF No. 4.2 Plaintiffs' suit was first filed in the United States District Court for the Middle District of Florida in May 2017, but the District Court ordered that the case be transferred to this court because it lacked jurisdiction over plaintiffs' claims. See District Court Transfer Order, No. 8:17-1094-T-33AAS (M.D. Fla. June 13, 2017), ECF No. 1. The complaint was transferred on September 18, 2017. See Compl. On January 30, 2018, defendant filed a motion to dismiss all claims pursuant to RCFC 12(b)(1) and 12(b)(6), ECF No. 12, and this court granted the motion to dismiss on April 10, 2018, finding that it also lacked jurisdiction to hear plaintiffs' claims, see Taha I, 137 Fed. Cl. at 469.
The Federal Circuit affirmed-in-part, vacated-in-part, and remanded the case back to this court on December 14, 2018. Taha II, 757 Fed. Appx. at 954. In a per curiam decision, the Federal Circuit affirmed that this court lacked subject-matter jurisdiction over the 2002 and 2004 tax refund claims because plaintiffs "did not file their tax refund suit within the statutorily-prescribed two-year period from the date the [Internal Revenue Service ("IRS")] first mailed notices of disallowance for those claims." Id. at 951. The Federal Circuit, however, remanded the case to this court to make factual findings related to the 2003 tax refund claim. Id. at 954. This opinion addresses the remanded issues.
The 2003 tax refund claim stems from Mr. Mohamad Taha's shareholding in Atek Construction, Inc. ("Atek"). Atek was a Subchapter S Corporation formed in 1996 by Mr. Ali Taha and his nephew, Mr. Eyad Khalil. See Tr. 120:11-18; 121:6-8 (Test. of Ali Taha).3 Atekwas a construction company that bid on and completed work for various public projects, often working with subcontractors for these projects and obtaining bonds from surety companies for each project. See Tr. 125:21-25; 126:13-22 (Taha). When Atek was formed, Mr. Ali Taha and Mr. Khalil were equal owners, each with 50%. Tr. 121:6-11 (Taha). In 2002, following Mr. Mohamad Taha's arrival in the United States, Mr. Ali Taha gave ten percent of his shares to his brother, Mr. Mohamad Taha, to help him financially because he was unemployed. See Tr. 123:18 to 124:1; 132:1-3 (Taha). Mr. Mohamad Taha did not pay any money or perform any services for these shares. Tr. 124:16-21 (Taha). Mr. Ali Taha also gave five percent of his shares in Atek to another brother. Tr. 124:24 to 125:2 (Taha). Thus, by 2002, Atek was a family-owned company with four shareholders: Mr. Khalil with 50% percent, Mr. Ali Taha with 35%, Mr. Mohamad Taha with 10%, and Mr. Ali Taha's other brother with 5%. See Tr. 125:6-18 (Taha).
For tax years 2002 and 2003, Atek reported ordinary business income of $839,682 and S745,962 respectively. DX 9 at 1 (Atek's Form 1120S for 2002); DX 10 at 1 (Atek's Form 1120S for 2003). Because Atek was an S corporation, Atek's income was considered pass-through income, meaning its shareholders were required to report their pro rata share of Atek's income on their own individual income tax returns. See 26 U.S.C. § 1366. Therefore, Mr. Mohamad Taha reported income from Atek of $83,968 for tax year 2002 and $74,566 for tax year 2003. See PX B1 at 37 (Mr. Mohamad Taha's and Ms. Sanaa Yassin's Form 1040 for 2002); PX B2 at 43 (Mr. Mohamad Taha's and Ms. Sanaa Yassin's Form 1040 for 2003). Mr. Mohamad Taha and Ms. Yassin paid taxes on this income in the amount of $8,573 for 2002 and $5,604 for 2003. DX 1 at 2; DX 2 at 2. Plaintiffs in this case are seeking a refund for these taxes, totaling $14,177.4
While Mr. Mohamad Taha and Ms. Yassin paid taxes on this income, they never received distributions from Atek equal to the full amount they had to report as income; instead, Atek retained most of this money to sustain the company's operations. See Tr. 129:14-20 (Taha). By the end of 2003, plaintiffs had received only $20,000 in distributions from Atek. See Tr. 142:20-22 (Taha). For each of these two years, plaintiffs received a "promissory note" from Atek, drafted and signed by Mr. Ali Taha, that included Atek's promise to pay plaintiffs and listed the amount owed to plaintiffs from their profit distributions retained by Atek as well as an interest rate of 10% to be applied at some unspecified future date of payment. See generally PX C1 (2002 Promissory Note); PX C2 (2003 Promissory Note).5
In the fall of 2004, Atek experienced financial difficulties due to lack of payments from various project owners for whom Atek worked. Tr. 16:17-19 (Taha). Atek's creditors sought payment from Atek, and when Atek was unable to make these payments, the creditors then sought payment from the bonding companies securing Atek's various projects. See Tr. 16:19-21 (Taha). The bonding companies immediately took over the operations of Atek and filed lawsuits against Atek and its primary shareholders. Tr. 16:22-25 (Taha). In at least one lawsuit, the court entered judgment in favor of the bonding company against Atek. See generally DX 26. Because Mr. Mohamad Taha had not received any payments regarding the undistributed income, he later sought to recover his undistributed amounts via a bankruptcy action that had been brought by Mr. Khalil, another shareholder, in 2006. See PX H2 at 92. Mr. Mohamad Taha was unsuccessful in his claim for payment because the bankruptcy court found that there were insufficient funds to distribute to creditors. See id. Therefore, Mr. Mohamad Taha was never paid the retained shareholder distributions.
Mr. Ali Taha helped Mr. Mohamad Taha and Ms. Yassin prepare both of their original income tax forms, Form 1040, for 2002 and 2003, and additionally helped to prepare their amended income tax forms for 2002 and 2003, Form 1040X. See Tr. 57:19-20; 58:25 to 59:1; 78:20-25 (Taha). On plaintiffs' amended tax return for 2003, plaintiffs claimed they were owed a refund of $5,604 for "[i]ncome from Schedule K-1 as shown on Schedule E not collected - loss because Atek Construction ceased business." PX G2 at 80-81. Plaintiffs made a similar refund claim in their 2002 amended tax return. See PX G1 at 78-79. On November 9, 2007, Ms. Yassin signed both the Form 1040X for tax year 2002 and Form 1040X for tax year 2003. PX G1 at 78; PX G2 at 80. Mr. Ali Taha testified that "both [the] 2002 and 2003 [amended returns] were filed simultaneously. . . and taken to the post office either by myself or my - whoever at the time, most likely myself, because plaintiffs didn't have transportation, [and] they didn't know where the post office [wa]s." Tr. 79:8-15 (Taha). The IRS received plaintiffs' Form 1040X for tax year 2002 on November 29, 2007, see DX 1 at 2, but the IRS's records do not reflect ever having received plaintiffs' Form 1040X for tax year 2003, see DX 2 at 2.
Mr. Taha recalls that based on his experience, the amended returns for each year were likely mailed in separate envelopes, but he could not testify affirmatively how the 2002 and 2003 returns specifically were mailed. See Tr. 79:21-25 (Taha). Because the IRS's records do not reflect ever having received the 2003 amended 1040X, the IRS never disallowed this refund claim.6 Following a series of letters exchanged between plaintiffs and the IRS after the IRS disallowed plaintiffs' 2002 claim, see generally PX H1; PX H2; PX I1; PX I2, plaintiffs filed this suit.
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