Uniquest Del. LLC v. United States

• Decision Date: 27 March 2018
• Docket Number: 1:15–CV–00638EAW
• Citation: 294 F.Supp.3d 107
• Parties: UNIQUEST DELAWARE LLC and Uniland Holdings LLC as Tax Matters Partner, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of New York

294 F.Supp.3d 107

UNIQUEST DELAWARE LLC and Uniland Holdings LLC as Tax Matters Partner, Plaintiffs,

v.UNITED STATES of America, Defendant.

1:15–CV–00638EAW

United States District Court, W.D. New York.

Signed March 27, 2018

Christopher L. Doyle, Pro Hac Vice, Hugh M. Russ, III, Hodgson Russ LLP, Buffalo, NY, for Plaintiff.

Teresa Marie Abney, Thomas Peter Cole, U. S. Department of Justice, Washington, DC, for Defendant.

DECISION AND ORDER

ELIZABETH A. WOLFORD, United States District Judge

INTRODUCTION

Presently before the Court are the Government's motion for summary judgment (Dkt. 37) and a cross-motion for summary judgment by Plaintiffs Uniquest Delaware LLC and Uniland Holdings LLC ("Plaintiffs") (Dkt. 41). The material facts are largely undisputed. The parties primarily disagree about whether grants valued at $11 million provided to Plaintiffs by the New York State Empire State Development Corporation ("Empire State Corporation") for the restoration of a building in Buffalo, New York, constitute income to Plaintiffs for federal income tax purposes. For the reasons that follow, the Court concludes that the grants are income. As a result, the Court grants the Government's motion for summary judgment (Dkt. 37) in part, denies the motion as moot insofar as it seeks summary judgment on the Government's counterclaim, and denies Plaintiffs' cross-motion for summary judgment (Dkt. 41).

BACKGROUND

The parties agree on the material facts, and the facts laid out below are taken from the parties' Rule 56 statements. (Dkt. 37–1; Dkt. 41–1; Dkt. 41–2; Dkt. 47–1).

Uniquest Delaware LLC ("Uniquest") is a limited liability company organized under the laws of New York State. (Dkt. 37–1 at ¶ 1; Dkt 41–1 at ¶ 1). Uniquest is treated as a partnership for federal income tax purposes, pursuant to 26 U.S.C. § 761(a). (Dkt. 37–1 at ¶ 2; Dkt. 41–1 at ¶ 2). Uniquest has two members, Uniland Holdings LLC ("Uniland") and UQD Holdings LLC ("UQD Holdings"). (Dkt. 37–1 at ¶ 1; Dkt. 41–1 at ¶ 1). UQD Holdings and Uniland are both owned by two corporations, Univest I Corporation and Univest II Corporation (collectively, the "Univest Corporations"). (Dkt. 41–2 at ¶¶ 1–2; Dkt. 47–1 at ¶¶ 1–2). The Univest Corporations are subject to tax under Subchapter S of the Internal Revenue Code ("IRC"). (Dkt. 41–2 at ¶¶ 1–2; Dkt. 47–1 at ¶¶ 1–2).

In 2006, Uniquest purchased the Avant Building, formerly the Dulski federal office building, in the City of Buffalo. (Dkt. 37–1 at ¶¶ 4–6; Dkt. 41–1 at ¶¶ 4–6). At the time of the purchase, Uniquest was an unincorporated joint venture between Uniland and another limited liability company known as Acquest TP Acquisition, LLC ("Acquest"). (Dkt. 37–1 at ¶ 7; Dkt. 41–1 at ¶ 7). In 2008, Acquest sold its interest in Uniquest to UQD Holdings. (Dkt. 37–1 at ¶ 9; Dkt. 41–1 at ¶ 9). Uniland and UQD Holdings each own a 50% interest in Uniquest. (Dkt. 37–1 at ¶ 10; Dkt. 41–1 at ¶ 10).

When Uniquest purchased the Avant Building, it had been closed due to environmental concerns. (Dkt. 37–1 at ¶ 11; Dkt. 41–1 at ¶ 11). Uniquest expected to receive tax credits under New York State's Brownfield Cleanup Program to help fund the expected asbestos remediation. (Dkt. 37–1 at ¶ 12; Dkt. 41–1 at ¶ 12). In August 2007, Uniquest received an opinion from its attorney that it was unlikely to be eligible for those tax credits; by that point, Uniquest had already commenced an asbestos remediation project. (Dkt. 37–1 at ¶ 13; Dkt. 41–1 at ¶ 13). Uniquest contacted Empire State Corporation to discuss other possible state funding options. ( Dkt. 37–1 at ¶ 14; Dkt. 41–1 at ¶ 14). To obtain funding from the state, Uniquest represented that it planned to develop the Avant Building as "an approximately 150–room full service hotel, 37 condominium residential units, and a 128,000 square ft. Class A office condominium." (Dkt. 37–1 at ¶ 16; Dkt. 41–1 at ¶ 16). Uniquest also represented that the project would result in hundreds of additional jobs related to business activities associated with the Avant Building. (Dkt. 37–1 at ¶ 17; Dkt. 41–1 at ¶ 17). Empire State Corporation in turn provided Uniquest with a draft proposal regarding the Avant Project. (Dkt. 37–1 at ¶ 15; Dkt. 41–1 at ¶ 15).

Empire State Corporation proposed three separate grants, each for specified purposes, with an aggregate grant amount of $7 million. (Dkt. 37–1 at ¶ 18; Dkt. 41–1 at ¶ 18). As described by the proposal, the V784 grant, in the amount of $2,314,000, would be used for "[r]eimbursement for a portion of demolition, construction and building development costs associated with the office component of the project." (Dkt. 37–1 at ¶ 19; Dkt. 37–4 at 5; Dkt. 41–1 at ¶ 19). The V806 grant, in the amount of $1,886,000, would be used for "[r]eimbursement for a portion of the demolition, construction and new building construction costs associated with the hotel and restaurant component of the project." (Dkt. 37–1 at ¶ 19; Dkt. 37–4 at 6; Dkt. 41–1 at ¶ 19). The V785 grant, in an amount of up to $2.8 million, would be used "for a portion of costs associated with the building shell renovation and interior expansion of the hotel component of the project." (Dkt. 37–1 at ¶ 19; Dkt. 37–4 at 7; Dkt. 41–1 at ¶ 19). That proposal was later superseded by a revised proposal, which the parties signed in early 2008, but the above-quoted portions remained the same. (Dkt. 37–4 at 5).

The November 12, 2007, version of the proposal contained the following language in its introductory paragraph: "There is no element of compensation of specific, quantifiable or other services to the government agencies involved; the grants contemplated by this offer are being offered solely for the purpose of obtaining an advantage for the general community." (Dkt. 37–1 ¶ 23; Dkt. 41–1 at ¶ 23). That version of the proposal also stated that "[t]he development of [Uniquest's] property includes the construction of residential units, a hotel, parking facilities, offices and retail facilities and are major assets in the [Uniquest] capital structure." (Dkt. 37–1 at ¶ 24; Dkt. 41–1 at ¶ 24).

On November 13, 2007, George LaPoint, an employee of Empire State Corporation,¹ sent another employee an e-mail that said:

[J]ust a heads-up, if this becomes an issue: The IRC section 118 exclusion for nonshareholders contribution of capital to a corporation, by definition, is applicable only to corporations. If [Uniquest] elects to be taxed as a corporation, the "taxation of grants" issue should not be a problem; if, however, Uniquest is regarded as a partnership, IRC section 118 would not apply.

(Dkt. 37–1 at ¶ 25; Dkt. 41–1 at ¶ 25). Within hours, that email was sent to Uniquest. (Dkt. 37–1 at ¶ 25; Dkt. 41–1 at ¶ 25).

The final version of the proposal does not contain any language regarding the purpose or beneficiary of the Avant Project. (Dkt. 37–1 at ¶ 29; Dkt. 41–1 at ¶ 29). However, some of the other proposed changes remained. For example, the December 14, 2007, version of the proposal still provides that "[t]he development of [Uniquest's] property includes the construction of residential units, a hotel, parking facilities, and retail facilities." (Dkt. 37–1 at ¶ 29; Dkt. 41–1 at ¶ 29).

The proposal provided a schedule for the distribution of the grants, with no portion of the grants to be distributed until the corresponding aspect of the project was substantially completed. (Dkt. 37–1 at ¶ 30; Dkt. 41–1 at ¶ 30). Accordingly, none of the grants were paid in 2007 or 2008, as none of the necessary conditions for payment were met during those years. (Dkt. 37–1 at ¶ 30; Dkt. 41–1 at ¶ 30).

In June 2008, Uniquest began discussions with Empire State Corporation in an effort to obtain additional grants. (Dkt. 37–1 at ¶ 31; Dkt. 41–1 at ¶ 31). In January 2009, Uniquest submitted a revised grant proposal to Empire State Corporation. (Dkt. 37–1 at ¶ 32; Dkt. 41–1 at ¶ 32). In that proposal, the grants to which Empire State Corporation had previously committed would be increased by a total of $4 million, such that the total amount of the payments would now be $11 million. (Dkt. 37–1 at ¶ 32; Dkt. 41–1 at ¶ 32). Empire State Corporation agreed to the additional funding, and the total amount of $11 million was paid by the end of the year. (Dkt. 37–1 at ¶ 33; Dkt. 41–1 at ¶ 33). Throughout the remainder of this Decision and Order, the Court will refer to the $11 million payments as the "ESD grants."

Uniquest did not include the ESD grants on its 2009 Form 1065 partnership return as taxable income. (Dkt. 37–1 at ¶ 34; Dkt. 41–1 at ¶ 34). Uniquest took the position that the grants were nontaxable contributions to capital and thus excludible from income. (Dkt. 37–1 at ¶ 34; Dkt. 41–1 at ¶ 34). However, the IRS determined that the ESD grants constituted income to Uniquest. (Dkt. 37–1 at ¶ 38; Dkt. 41–1 at ¶ 38). The IRS also determined that the $11 million in income permitted Uniquest to claim additional depreciation deductions for the 2009, 2010, and 2011 tax years. (Dkt. 37–1 at ¶ 39; Dkt. 41–1 at ¶ 39). Adding $11 million to Uniquest's income (which the taxpayer had reinvested into assets) raised the taxpayer's basis in the Avant Project, thus allowing an increased depreciation deduction based upon the higher basis. (Dkt. 37–1 at ¶ 39; Dkt. 41–1 at ¶ 39).

After the IRS examiner proposed making an $11 million adjustment to Uniquest's taxable income for the 2009 year (reduced by the additional depreciation), Uniquest sought a hearing with the Appeals Branch of the IRS. (Dkt. 37–1 at ¶ 40; Dkt. 41–1 at ¶ 40). The Appeals Branch of the IRS sustained the proposed adjustment to income, such that the final action of the IRS proposed an $11 million increase in Uniquest's taxable income for the 2009 tax year. (Dkt. 37–1 at ¶ 41; Dkt. 41–1 at ¶ 41).

Plaintiffs brought this action seeking judicial review of an IRS Final Partnership Administrative Action pursuant to 26 U.S.C. § 6226. (Dkt. 37–1 at ¶ 44; Dkt. 41–1 at ¶ 44). The Government filed a counterclaim,...