Washburn v. Comm'r
| Decision Date | 12 July 2018 |
| Docket Number | Docket No. 13304-16L.,T.C. Memo. 2018-110 |
| Parties | MARTIN W. WASHBURN, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Richard Todd Luoma, Betty J. Williams, and Matthew D. Carlson, for petitioner.
Bryant W. Smith and Trent D. Usitalo, for respondent.
LEYDEN, Special Trial Judge: The Internal Revenue Service (IRS) Office of Appeals (Appeals Office) issued petitioner a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination) dated May 10, 2016.1 The notice of determination sustained a proposed levy with respect to petitioner's unpaid income tax liability for 2014.
The parties stipulated that if the Court determines that petitioner is liable for the underlying income tax liability for 2014, then the proposed levy is appropriate. Therefore, the sole issue for decision is whether petitioner is entitled to a miscellaneous itemized deduction of $400,000 for restitution payments he made in 2014. The Court holds that petitioner is not entitled to the miscellaneous itemized deduction.
The parties submitted this case fully stipulated pursuant to Rule 122. Petitioner resided in California when he timely filed his petition.
In 1982 petitioner founded FoodPro International, Inc. (FoodPro), a California corporation, and was its president at all times relevant to this case.2 FoodPro owned 50.46% of Golden Sierra Partners, LLC (GSP), a Nevada limitedliability company.3 Two other entities owned the remaining interests in GSP. Petitioner was the corporate secretary of GSP at all times relevant to this case.
Petitioner and four other individuals (hereinafter sometimes collectively referred to as codefendants) participated in a scheme to defraud the Overseas Private Investment Corporation (OPIC) to obtain a loan of about $9.4 million for GSP. In March 2003 petitioner, in his capacity as the corporate secretary of GSP, submitted an application to OPIC for the loan to fund GSP's milling and bakery operation in Estonia. FoodPro was GSP's U.S. sponsor for purposes of the OPIC loan.4 The loan application stated that GSP would be capitalized with approximately $16.5 million. Slightly more than one-half of GSP's milling and bakery operation would be funded by the loan from OPIC and the remainingamount would be funded by investment contributions to GSP by FoodPro, as represented by petitioner in his capacity as president of FoodPro, and GSP's two other owners. In September 2003 OPIC and GSP signed a loan agreement in which OPIC agreed to lend GSP about $9.4 million. OPIC made two loan disbursements, totaling $7,918,486, by wire transfers in 2003 and 2004 to GSP's bank account.
In 2004 GSP constructed a grain drying facility in Vahenurme, Estonia, and purchased a bakery in Valga, Estonia. During 2004 and 2005 GSP undertook the construction of a mill in Viljandi, Estonia. As the project progressed, GSP made regular loan interest payments.
Thereafter disputes arose over the management and control of the milling and bakery operation. It was during the course of these disputes that OPIC discovered that GSP had misrepresented certain facts in its loan application. Contrary to the statements in the loan application, the investment contributions to GSP by FoodPro and one other GSP owner were in substance a disguised loan from one of the codefendants. Petitioner and his codefendants withheld bank statements from OPIC that showed that the investment contributions by FoodPro and one other GSP owner were immediately distributed to the codefendant who made the loan.
The loan application also misstated the estimated equipment prices and reported that FoodPro did not own any related companies. The estimated equipment prices reported in the loan application were seriously overstated, and GSP purchased the equipment from companies that were related to FoodPro. Petitioner and his codefendants: (1) submitted falsified invoices to OPIC that listed the overstated equipment prices, (2) concealed the close relationship between FoodPro and the companies from which the equipment was purchased, (3) made false assurances to OPIC with respect to the progress of the project, and (4) falsely affirmed the accuracy of their disclosures to OPIC.
In March 2005, after OPIC discovered the misrepresentations, petitioner and GSP's chief executive officer, one of the codefendants, met with representatives from OPIC. They agreed that OPIC would repossess all of GSP's assets, which OPIC valued at $4,750,000, in an attempt by OPIC to recoup what it had lent GSP. At that time GSP's assets included the Viljandi mill, the Vahenurme grain drying facility, and the Valga bakery. OPIC also recovered $1,045,550 of cash remaining from OPIC's loan in GSP's bank account.5
On May 3, 2011, petitioner, in connection to his actions on behalf of GSP and FoodPro, pleaded guilty to one count of conspiring to commit mail and wire fraud, see 18 U.S.C. sec. 1349 (2006), and to one count of conspiring to commit money laundering, see 18 U.S.C. sec. 1956(h) (2006). On August 30, 2011, the District Court entered its amended judgment in the criminal case against petitioner and ordered imprisonment, restitution, and forfeiture but expressly declined to order a fine.6
The District Court sentenced petitioner to 12 months' imprisonment for each of the two counts, to run concurrently. Upon the completion of the 12 month-imprisonment, petitioner would be on supervised release for three years on each of the two counts, to run concurrently. During the first 12 months of supervised release petitioner was required to serve in-home detention with electronic monitoring.
During the sentencing hearing held on June 14, 2011, the District Court, petitioner, his codefendants, and the Government focused on OPIC's total loss to calculate the amount of restitution to impose. The Government argued for restitution of $6,913,219.50 while petitioner and his codefendants argued for restitution of $1,398,434.16.
The Government calculated the proposed restitution amount of $6,913,219.50 by aggregating the loan disbursements of $7,918,486 from OPIC; payments of $656,264.76 by OPIC to a contractor to complete the bakery for purposes of resale; and legal, engineering, and other fees of $813,090.84 incurred by OPIC and reducing that total by the $1,045,550 recovered from GSP's bank account, the $135,867.84 of refunded VAT, and the actual proceeds of $1,293,204.26 OPIC received from the sale of GSP's assets.
Petitioner and his codefendants calculated the proposed restitution amount of $1,398,434.16 by aggregating the loan disbursements of $7,918,486 from OPIC and reducing that total amount by the $1,045,550 recovered from GSP's bank account, the $135,867.84 of refunded VAT, the $588,634 of regular interest payments GSP had already made to OPIC on the loan, and the $4,750,000 at which OPIC valued GSP's assets (excluding cash) at the time it repossessed all of GSP's assets.7
The District Court ultimately determined that the total amount of restitution owed to OPIC was $2 million,8 closer to the amount proposed by petitioner and his codefendants. This amount was apportioned between petitioner and three of his codefendants. Specifically, petitioner was ordered to pay restitution of $750,000for his criminal conduct in obtaining the loan and loan disbursements from OPIC to fund GSP's milling and bakery operation in Estonia.
The District Court also ordered petitioner to forfeit his interest in unspecified property. The amount of this forfeiture, due under 18 U.S.C. sec. 982(a)(1) (2006), was to be $750,000, the same amount as the restitution. If petitioner paid the full restitution, he would not have to forfeit his interest in the unspecified property.
The District Court expressly declined to impose a fine on petitioner. It did impose a special assessment of $100 on each of the two counts.
As relevant in this case, in March 2014 petitioner made four restitution payments totaling $400,000 in the following amounts: (1) $240,000 from an individual retirement account (IRA) in petitioner's name, (2) $30,000 from a second IRA in petitioner's name, (3) $30,000 from an investment account in petitioner's name, and (4) $100,000 from another investment account in petitioner's and someone else's name as trustees for the business of FoodPro.
Petitioner timely filed a 2014 Form 1040, U.S. Individual Income Tax Return. Among other things, petitioner reported wages and attached to the tax return a Form W-2, Wage and Tax Statement, from FoodPro. Petitioner did not report any business income or loss from a Schedule C, Profit or Loss From Business. A Schedule E, Supplemental Income and Loss, attached to the 2014 tax return did not report either FoodPro or GSP as entities from which petitioner received income or incurred a loss. In the 2014 tax return petitioner reported a total tax of $111,222, a Federal income tax withholding credit of $16, and estimated tax payments of $400,000 (the amount he had paid in restitution during 2014), resulting in an overpayment of $288,794.
On May 18, 2015, the IRS mailed petitioner a Notice CP23, Changes to your 2014 Form 1040, informing petitioner that its records did not show that petitioner had made any estimated tax payments for that year. The Notice CP23 removed the $400,000 of estimated tax payments petitioner had reported on the 2014 tax return. The Notice CP23 also notified petitioner that the IRS had assessed the reported total tax, additions to tax under sections 6651(a)(2) and 6654(a), and interest for 2014 and demanded payment.
On October 12, 2015, the IRS mailed petitioner a Notice CP90, Intent to seize your assets and notice of your right to a hearing, with respect to his unpaid income tax liability...
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