Opinion
Case No. 02-21320-CIV-HUCK/TURNOFF
December 17, 2002
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
THIS CAUSE came before the Court on December 10, 2002 for oral argument on the Defendant, United States of America's Motion for Summary Judgment [DE #10] and the Plaintiff, Roland Wood's Cross Motion for Summary Judgment [DE #13]. The Court, having reviewed the parties' legal memoranda and other pertinent portions of the record, having heard the parties' oral argument and being fully advised on the matters, GRANTS the Defendant's Motion and DENIES the Plaintiffs Motion.
Factual and Procedural Background
The parties agree that the facts are not in dispute and that this case should be resolved by summary judgment.
The facts set forth in this section are taken from the Defendant's Concise Statement of Material Facts as to Which There is no Genuine Issue for Trial. The Plaintiff accepts these facts as true.
In 1996, Wood and others were indicted in United States of America v. Refrigeration U.S.A., Inc., et al., No. 96-0267-CR-MORENO (S.D. Fla.). Count 142 of the Superseding Indictment charged Wood with conspiracy (1) to import and cause to be imported into the United States a Class 1 controlled substance (CFC-12), in violation of 42 U.S.C. § 7413 (c)(1) and 7671(c); 18 U.S.C. § 2; and 40 C.F.R. § 82.4 (b); (2) to import and cause to be imported into the United States merchandise (CFC-12), contrary to law, that is, 42 U.S.C. § 7413 (c)(1) and 7671(c) and 40 C.F.R. § 82.4 (b); all in violation of 18 U.S.C. § 545 and 2; (3) and to defraud the United States by impeding, impairing, obstructing, and defeating by deceitful and dishonest means the lawful governmental functions of the Treasury Department and the Internal Revenue Service in the ascertainment, computation, assessment, and collection of revenue, to wit, federal excise taxes on ODC's (ozone-depleting chemicals, in that case, freon).
On or about May 28, 2997, Wood entered into a plea agreement with the United States Attorney for the Southern District of Florida ("AUSA") in Case No. 96-0267. The agreement provided that Wood would plead guilty to Count 142 of the Superseding Indictment. Pursuant to the agreement, Wood agreed to forfeit certain assets to the United States pursuant to 18 U.S.C. § 981 and 982 for violations of 18 U.S.C. § 1956 and 545. Wood also agreed "to fully and unreservedly cooperate and assist the United States in the forfeiture and recovery of the forfeited assets." The plea agreement provided in pertinent part that Wood understood that the Court could impose an order of restitution and that:
[Wood agreed] to cooperate with the Internal Revenue Service in its civil examination and determination of taxes arising from his activities involving the importation and sale of ozone-depleting chemicals. . . Nothing in this Agreement shall otherwise limit the IRS in its determination of taxes, interest and penalties for which the defendant may be legally responsible or liable, or limit the defendant's right to available process to contest such determinations.
The district court held two hearings regarding Wood's sentence on August 22 and 29, 1997. During the August 22 hearing, the court raised the question of whether restitution should be imposed. Wood's counsel suggested that the forfeiture of his assets be considered "a type of restitution."
At the second hearing, the AUSA indicated that the taxes imposed on Wood's corporation and co-defendant, Refrigeration U.S.A., Inc., could be attributed to Wood himself. He went on to retreat from that position, however, suggesting instead that the Court could make cooperation with the Internal Revenue Service ("IRS") with regard to determination and payment of taxes a special condition of Wood's probation. The AUSA expressly stated that "it would be improper for the Court to order, as a restitution order, the payment of the tax in the absence of an agreement in the plea agreement to do so." He explained that courts have only ordered restitution where a plea agreement provided authority for doing so, and that the authority was not present in Wood's case "because the plea agreement is silent on the specific number and a restitution order." The district court stated that restitution would not be ordered. Wood's counsel stated that he agreed with the AUSA that it would not be unreasonable to require Wood to cooperate with the IRS as a special condition of probation. Wood was then sentenced to 37 months imprisonment, plus three years of supervised release, a $50 assessment, and a $375,000 fine. In addition, and pursuant to the plea agreement, Wood was ordered to forfeit $4,965,049.34 to the United States in 1997. This forfeiture was carried out under 19 U.S.C. § 1607.
On April 5, 1999, pursuant to agreement with Wood, the IRS adjusted Wood's income for the year 1994, increasing his income in the amount of $2,799,150. The IRS assessed additional tax on that increased income, which has been paid or abated. On or about June 15, 1999, Wood filed claims for refund of income taxes for the years 1994, 1995 and 1997. Wood's claim for refund for 1997 was made on grounds that the funds he forfeited in that year pursuant to his plea agreement and the district court's sentencing order were deductible under sections 162, 164 or 165, of the Internal Revenue Code of 1986, 26 U.S.C. Because the claimed deduction exceeded Wood's income for 1997, it would have created a loss which he could carry back and deduct against his income for 1994 and 1995, under § 172. On April 9, 2001, a delegate of the Secretary of the Treasury disallowed Wood's claim for refund. After Wood's claim was disallowed, but while Wood was pursuing a protest of the disallowance with the Appeals Division of the IRS, Wood raised two additional grounds for his refund. He claimed that the mitigation provisions of § 1311 et seq., applied to prevent double inclusion of income, and that denial of a deduction for the forfeiture would impermissibly constitute a tax on gross income, which, he contended, would be unconstitutional.
Unless otherwise indicated, all section references hereinafter are to the Internal Revenue Code of 1986, 26 U.S.C.
In addition to the above facts, the Wood asks the Court to consider, and the Court has considered, two additional exhibits, IRS Service Form 637 and an excerpt from IRS Agent, Ron Megen's Report (Exhibit A and B to Wood's cross motion).
In the present action Wood seeks a refund of income taxes paid, interest, and penalties, plus damages pursuant to § 7433 because of Defendant's alleged reckless, intentional, and negligent disregard of the above-cited Internal Revenue Code sections.
Legal Standard
Summary judgment is appropriate if the pleadings, depositions, and affidavits show that there is no genuine issue of material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). An issue is "material" if it is a legal element of the claim under applicable substantive law which might affect the outcome of the case. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986); Allen v. Tyson Foods, 121 F.3d 642, 646 (11th Cir. 1997). An issue is "genuine" if the record taken as a whole could lead a rational trier of fact to find for the non-moving party. Allen, 121 F.3d at 646. On a motion for summary judgment, the Court must view all the evidence and all factual inferences drawn therefrom in the light most favorable to the non-moving party, and determine whether that evidence could reasonably sustain a jury verdict. Celotex, 477 U.S. at 322-23; Allen, at 646.
While the burden on the movant is great, the opposing party has a duty to present affirmative evidence in order to defeat a properly supported motion for summary judgment. Anderson, 477 U.S. at 252. A mere "scintilla" of evidence in favor of the non-moving party, or evidence that is merely colorable or not significantly probative is not enough. Id.; see also Mayfield v. Patterson Pump Co., 101 F.3d 1371, 1376 (11th Cir. 1996) (conclusory allegations and conjecture cannot be the basis for denying summary judgment).
In their respective legal memoranda and oral argument both parties agree that there are no genuine issues of material fact and that this case should be resolved as a matter of law on the cross motions for summary judgment.
Discussion
As indicated above, the central issue presented is whether Wood may deduct from his gross income those funds which he forfeited pursuant to his conviction and sentencing in Case No. 96-0267 for illegally importing freon into this country and evading the excise taxes associated with that importation. The resolution of that issue, in turn, depends on the determination of several sub-issues which both parties have identified and discussed in their respective memoranda and which will be discussed below in the order suggested by the parties.
In addition to his claim that he is entitled to deduct his forfeiture payments, Wood also claims that he is entitled to recover damages under § 7433 for Defendant's negligent, reckless and intentional disregard of the Internal Revenue Code ("Code") or the regulations thereunder while collecting Wood's taxes.
1. Whether the forfeited funds are deductible under § 165.
§ 165 allows a deduction against gross income for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." Wood contends that his forfeiture payments represent losses he sustained during 1997 and, therefore, are all deductible under § 165. The Defendant acknowledges that losses incurred by a taxpayer are generally deductible under § 165(a) for purposes of computing income tax liability, and that the forfeitures are losses. However, Defendant argues that because Wood's loss is in the form of forfeiture payments resulting from his criminal conviction, they were properly disallowed based on a sharply defined policy against the criminal activity involved.
Because Wood's claimed losses were forfeitures arising directly out of his criminal activity of smuggling freon and evading related excise taxes, and because allowance of the forfeiture amounts as deductions would obviously frustrate the national policy prohibiting such criminal activity, the Court concludes that Wood may not deduct such losses under § 165.
While there is no Eleventh Circuit case deciding this issue, the Court has determined that other courts, when confronted with this issue or materially similar issues, have consistently disallowed losses, which would otherwise be deductible under § 165, where the losses constituted forfeited money obtained by the taxpayers by virtue of their drug and other serious criminal activity. The rationale for such denial, in the absence of a specific Code provision, is that allowance of a deduction based on forfeiture would frustrate a sharply defined public policy against the related criminal activity. See King v. U.S., 152 F.3d 1200 (9th Cir. 1998); Wood v. U.S., 863 F.2d 417 (5th Cir. 1989), U.S. v. Algemene Kunstzijde Unie, N.V., 226 F.2d 115 (4th Cir. 1955); Hopka v. U.S., 195 F. Supp. 474 (N.D. Iowa 1961); Murillo v. C.I.R., T.C. Memo. 1998-13, 1998 WL 6462 (U.S.Tax Ct., 1998); Ruddell v. C.I.R., T.C. Memo. 1996-125, 1996 WL 107400 (U.S. Tax Ct.); Ginsburg v. C.I.R., T.C. Memo. 1994-272, 1994 WL 259249 (U.S. Tax Ct., 1996). See also, Stephens v. C.I.R., 905 F.2d 667 (2nd Cir. 1990); Fuller v. C.I.R., 213 F.2d 102 (10th Cir. 1954); Collins v. C.I.R., T.C. Memo. 1991-553, 1991 WL 224508 (U.S.Tax Ct., 1991).
In determining that forfeitures are non-deductible losses based on public policy consideration, these courts, either explicitly or implicitly, analogize forfeitures to penalties. The Wood court rejected taxpayer's contention that, because forfeiture, arising out of criminal activity, is a civil, not a criminal sanction, the deduction of the forfeiture amount would not offend public policy and thus should be allowed. In doing so, that court correctly observed that "forfeiture cannot seriously be considered anything other than an economic penalty for drug trafficking." Wood, 863 F.2d at 421. See also King, 152 F.3d at 1202.
In support of his argument for deductibility of his forfeiture payments, Wood offers as its main legal precedent, Ianniello v. C.I.R., 98 T.C. 165 (1992) (U.S. Tax Ct., 1992) Wood argues that Ianniello stands for the proposition that forfeiture payments are deductible under § 165. However, in that case the court did not hold that forfeitures are deductible. Rather, the Ianniello court merely addressed the issue of whether a forfeiture of money could relate back to the earlier tax period during which the taxpayer obtained the money. In reaching its decision that it could not, the court did not have to resolve and, therefore, did not discuss the public policy issue before this Court or decide whether forfeited monies are, in fact, deductible losses. See King v. U.S., 152 F.3d at 1202. Thus, Ianniello does not support Wood's argument.
Wood also suggests that because he "was engaged in a perfectly legal business," importation and sale of freon, and the above cited decisions related to illegal businesses, such as illegal narcotics or gambling, those decisions are not good precedent in this case. The Court rejects Wood's argument for two reasons. First, the above cited decisions are not limited to the operation of illegal businesses. For examples, in Ginsburg, the taxpayer's criminal activity, bribery, arose out of his law practice; in Collins, the taxpayer sold computer equipment; in Fuller, the taxpayer transported into and sold intoxicating liquor in a "dry state"; in Murillo, the taxpayer was structuring deposits into his bank account. Second, and more important, Wood's forfeiture arose out of his illegal activity, smuggling freon and evading the excise taxes on it, not a perfectly legal business. This type of criminal activity, a felony, is obviously against public policy. See King, 152 F.2d at 1202 ("If both kinds of conduct, embezzlement and growing marijuana, were not strongly against public policy, they wold not be felonies.").
In summary, the Court accepts the proposition that because Wood's forfeiture is in the nature of an economic penalty for illegal activity in contravention of established national policy, Wood's forfeiture payments are not deductible under § 165(a).
2. Whether the forfeited funds are deductible under § 162.
Wood argues that because his excise tax payments, which are actually made in connection with his legitimate freon business, are customarily treated as ordinary and necessary business expenses under § 162, the forfeiture payments are likewise deductible as business expenses. Wood reaches his conclusion by equating his forfeiture payment (resulting from not paying the excise taxes) with the payment of the excise taxes themselves, which taxes he would have incurred in the operation of a legal business had he not illegally smuggled the freon and evaded taxes on it. The Court must reject Wood's argument for two reasons. First, Wood's argument ignores the fact that his forfeiture payments were not the result of Wood's legitimate business, but rather his illegal business. Second, despite of Wood's attempt to recast his forfeiture payments as payment of excise taxes, the forfeiture payments were not payments of, or a substitute for payment of, those excise taxes which Wood evaded, the very criminal act resulting in the forfeiture payments. Admittedly, the forfeiture payments represented ill-gained monies from Wood's off-the-books freon business, and that excise taxes should have been paid on the freon. However, this does not transform the forfeiture payments into the excise taxes which Wood should have, but failed to pay. Moreover, the record does not establish that the forfeited payments were paid to the IRS, as payment for Wood's excise taxes. To the contrary, the forfeited funds went to the United States Attorney pursuant to 19 U.S.C. § 1607. Under § 1607(c), such forfeiture payments go to the Customs Forfeiture Fund, are available to the Customs Service and are not available to the IRS to be applied as payments of the excise taxes which Wood sought to evade.
To allow deduction for the forfeiture payments pursuant to § 162 would, for the reasons discussed in section 1, "undermine public policy (against illegal activity) by permitting a portion of the forfeiture to be borne by the Government, thereby taking the `sting' out of the forfeiture." Murillo, 1998 WL 6462.
3. Whether the mitigation provision of § 1311 provides a basis for relief for Wood.
Wood next argues that he is entitled to relief under § 1311 by which $2,799,150 of the forfeiture payments would be deductible. § 1311 is intended to mitigate tax errors not otherwise correctable by operation of law, usually by reason of the statute of limitation, that otherwise bars relief which is fair and equitable. See U.S. v. Rachal, 312 F.2d 376 (5th Cir. 1962). Wood argues that § 1311 should be applied in this instance because on April 15, 1999, IRS adjusted Wood 1994 gross income by $2,799,150. This $2,799,150 income adjustment resulted from the disallowance of payments, denominated as brokerage fee expenses, made by Wood's Subchapter S corporation to his offshore company. Wood argues that this results in a double disallowance of a deduction, referring to the $2,799,150 in brokerage fees disallowed as a business expense of his Subchapter S corporation, and, thus, ultimately included in his gross income, and to $2,799,150 of the forfeiture payments. The Court finds that there was no double disallowance of a deduction as Wood contends. The $2,799,150 brokerage fee disallowance simply resulted in properly attributing to Wood that income which he attempted to shield from taxation as additional costs of goods, in the form of brokerage fees paid by his Subchapter S corporation to his offshore company. This was an unsuccessful attempt to shield that income from taxation by the IRS. The tax appeal examiner's determination that the $2,799,150 brokerage fees was not deductible, and therefore, included in Wood's income, involves completely different factual and legal considerations than those related to the non-deductibility of the forfeiture payments. To repeat, the non-deductibility of the forfeited funds arises solely by reason of Wood's smuggling of, and evading excise taxes on, freon and the public policy disfavoring such criminal conduct. That is a different matter than determining what gross income should be attributed to Wood. The Court concludes that there has been no double disallowance of a claimed deduction and Wood is not entitled to relief under § 1311.
Wood does not contest in these proceedings the appropriateness of the determination by the tax appeal examiner that the $2,799,150 in claimed brokerage fees to his offshore company was properly included in Wood's gross income.
4. Whether disallowance of deduction is unconstitutional.
Finally, Wood argues that disallowance of his claimed deduction for forfeiture payment amounts "to a tax on gross income, not net income, and is, therefore, unconstitutional." In making this argument, Wood principally relies on a passage he quotes from C.I.R. v. Teller, 383 U.S. 687, 691 (1966):
we started with the proposition that the Federal income tax is a tax on net income, not a sanction against wrongdoing. During the Senate debate in 1913 on the Bill that become the first modern income tax law, amendments were rejected that would have limited deductions for losses to those incurred in a "legitimate" or "lawful" trade or business. The object of this Bill is to tax a man's net income; that is to say, what he has at the end of the year, after deducting from his receipts his expenditures or losses. It is not to reform men's moral characters; that is not the object of the Bill at all.
In reliance on that passage, Wood concludes that disallowance of his forfeiture payment as a tax loss would be contrary to the holding in Tellier, and, therefore, unconstitutional. The Court disagrees. Tellier is inapposite to this case. In Tellier, the Supreme Court approved a security dealer's deduction of legal fees incurred to defend himself in a criminal prosecution for illegal securities dealings. That is not the case here. The Supreme Court, after acknowledging the rule established in Tank Truck Rentals, Inc. v. C.I.R., 356 U.S. 30 (1958), that public policy mandates non-deductibility of penalties resulting from criminal conduct, in order to discourage such criminal behavior, distinguished Tank Trust Rentals as follows:
The present case falls far outside that sharply limited and carefully defined category. No public policy is offended when a man faced with serious criminal charges employs a lawyer to help in his defense. That is not "proscribed conduct." It is his constitutional right. [Citations omitted.] In an adversary system of criminal justice, it is a basic of our public policy that a defendant in a criminal case have counsel to represent him.
Tellier, 383 U.S. at 694.
The principle enunciated in Tellier does not apply here. Wood is not asserting that the amount claimed as a loss or business expense arises from the constitutional right to employ counsel to defend against criminal charges. Wood's forfeiture payments arise out of his criminal conduct. Allowance of Wood's claimed deduction would undermine public policy, unlike the allowance for attorney's fees which is consistent with public policy. The Court concludes that disallowance of forfeiture payments does not violate Wood's constitutional rights.
5. Whether Wood has a claim for damages under § 7433.
Wood also seeks civil damages pursuant to § 7433 because of the Defendant's alleged reckless, intentional and negligent disregard of Code §§ 162, 164, 165 and 1311. Accepting as true all of Wood's well pleaded facts in his complaint, this claim fails for four reasons.
First, Wood has failed to show, or even allege, that he has exhausted his available administrative remedies, a condition precedent to seeking this relief. See § 7433(d)(1). Second, Wood has failed to establish, that he suffered any "actual, direct economic damages" sustained by him as a proximate result of any improper collection activity of the Defendant. See § 7433(b)(1).
Third, to the extent this claim constitutes a tort claim, it falls within Defendant's sovereign immunity. This is because Wood's damage claim sounds in tort and, except to the extent that the United States has expressly waived its sovereign immunity, the United States may not be sued in tort. U.S. v. Mitchell, 445 U.S. 535, 538 (1980); Eastern Associated Coal Corp. v. Director, Office of Workers' Compensation Programs, 791 F.2d 1129, 1131 (4th Cir. 1986). Any waiver of immunity by the United States is strictly construed and does not extend beyond the specific statutory language waiving immunity. U.S. v. Nordic Village, Inc., 503 U.S. 30, 33-34 (1992).
The Defendant has not waived its sovereign immunity with respect to this damage claim asserted by Wood. Generally, a plaintiff who seeks to sue the United States in tort does so pursuant to the Federal Tort Claims Act, 28 U.S.C. § 1346, 2671-1680 ("FTCA"). However, the FTCA provides no comfort to Wood. This is because the FTCA, by its express terms, excludes "[a]ny claim arising in respect of the assessment or collection of any tax." 28 U.S.C. § 2680 (c). This broad exclusion covers Wood's claim as it is alleged in the Complaint. See Perkins v. U.S., 55 F.3d 910, 914 (4th Cir. 1995); Jones v. U.S., 16 F.3d 979, 980-81 (8th Cir. 1994). As the Perkins Court observed, the § 2680(c) tax assessment or collection exclusion under the FTCA "is broad enough to encompass any activities of an IRS agent even remotely related to his or her official duties." Perkins, 55 F.3d at 913 (quoting Capozzoli v. Tracey, 663 F.2d 654, 658 (5th Cir. 1981) (emphasis in original)). This broad exclusion even includes an IRS agent's unauthorized tortious acts designed to intentionally and illegally intimidate and harass the taxpayer, so long as they arise out of tax collecting efforts. Capozzoli, 663 F.2d at 658; Morris v. U.S., 521 F.2d 872, 874 (9th Cir. 1975).
While the FTC does not allow claims arising out of tax collection activities, § 7433(a) does provide a statutory cause of action against the Defendant which is limited to damages caused by IRS'collection of taxes. As indicated above, all waivers of sovereign immunity must be strictly construed. § 7433 is no exception. Strictly construing and applying § 7433 to the facts alleged by Wood, it is readily apparent that his claim arises out of Defendant's alleged wrongful determination or assessment of his taxes, not the collection of taxes. Therefore, Wood has not alleged or established a claim under § 7433. See Gonsalves v. I.R.S., 975 F.2d 13, 16 (1st Cir. 1992) (§ 7433 does not create a cause of action based on an alleged "disregard in connection with the determination of tax"); Arnett v. U.S., 889 F. Supp. 1424 (D. Kan. 1995).
Finally, as discussed in section 1, 2 and 3 above, the Court has already concluded as a matter of law that the Defendant has not wrongfully disregarded the applicable provisions of the Code, but rather have applied them appropriately.
Conclusion
For the reasons discussed above, the Defendant, United States of America's Motion for Summary Judgment is GRANTED and the Plaintiff, Roland Wood's Cross Motion for Summary Judgment is DENIED. All other pending motions are denied as moot and the Clerk shall close this case.
DONE AND ORDERED