Gross v. United States ( 2023 )

Case: 22-40230 Document: 00516669870 Page: 1 Date Filed: 03/08/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
March 8, 2023
No. 22-40230 Lyle W. Cayce
Clerk
Robert Gross,
Plaintiff—Appellant,
versus
United States of America,
Defendant—Appellee.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 2:20-CV-192
Before Wiener, Stewart, and Engelhardt, Circuit Judges.
Per Curiam:*
Robert Gross appeals the district court’s dismissal of his claim for a
tax refund under Internal Revenue Code (“I.R.C.”) § 1341. Because he fails
to demonstrate that the district court erred in holding that he is not entitled
to a refund under another provision of the tax code, we AFFIRM.
*
This opinion is not designated for publication. See 5th Cir. R. 47.5.
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I. Background
Gross was a psychiatrist in Texas between 2007 and 2014. In October
2014, he was indicted on fifty-two counts of health care fraud for submitting
false claims for reimbursement to Medicare and Medicaid in violation of 18
U.S.C. § 1347. His indictment alleged that he sought reimbursement for
procedures he never performed and services rendered after patients had died.
In 2015, Gross entered into a plea agreement with the Government in which
he admitted to knowingly submitting a fraudulent Medicare claim for services
provided to a then-deceased patient.
Gross’s plea agreement included the following stipulations: (1) that
restitution could be included as part of his sentence and would account for all
of his actions, not simply the one count he was convicted of; (2) he would pay
restitution totaling $1,832,869.21—representing the amount of
overpayments he received—to the Government for the victims of his fraud;
(3) he would sign any documents necessary to facilitate his restitution
payments; (4) the approximately $2 million that the Government seized from
his various bank accounts would be applied toward any restitution he was
ordered to pay; and (5) he would not contest the forfeiture of any funds to the
United States. Ultimately, the district court sentenced Gross to 71 months in
prison and ordered him to pay criminal monetary payments, including $1.8
million in restitution. 1
Gross later filed his 2016 tax return and sought a refund of
$838,077.40 under § 1341. He based this amount on the $2.1 million he
repaid to Medicare and other private insurance companies as part of his plea
1
Gross was also ordered to pay a fine of $100,000 and to forfeit any interest accrued
in the funds that the Government seized.
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agreement. The IRS, however, did not consider the merits of his refund
request, so Gross filed suit.
In his suit, Gross claimed that he was entitled to a tax refund
under § 1341 because he paid taxes on income “which he reasonably thought
he had an unrestricted right” to, and he was later required to pay the
Government in accordance with his guilty plea agreement, “even though he
was not guilty.” The Government moved to dismiss his complaint, first
arguing that Gross did not and could not allege facts that would entitle him
to relief under § 1341. It also asserted that he failed to allege that there was a
separate basis for the deduction he claimed, which was required for relief
under § 1341. In response to the Government’s latter contention, Gross
averred that he had sufficiently alleged that he qualified for a deduction under
I.R.C. § 162(a).
The district court agreed with the Government and dismissed Gross’s
case. It reasoned that: (1) Gross could not have believed that he had an
unrestricted right to funds that he illegally obtained in a health care fraud
scheme; and (2) restitution does not qualify for deduction of “ordinary and
necessary expenses” under § 162(a) when paid pursuant to a criminal guilty
plea. Gross timely appealed.
II. Standard of Review
“To survive a motion to dismiss, a complaint must contain sufficient
factual matter . . . to state a claim to relief that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotations and citation
omitted). We accept a plaintiff’s “well-pleaded facts as true, viewing them
in the light most favorable to the plaintiff.” Allen v. Walmart Stores, LLC, 907
F.3d 170, 177 (5th Cir. 2018).
Whether a taxpayer is entitled to relief under § 1341 is a question of
statutory interpretation that we review de novo. See Carder v. Cont’l Airlines,
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Inc., 636 F.3d 172, 174 (5th Cir. 2011) (explaining that questions of statutory
interpretation are subject to de novo review).
III. Discussion
Gross argues that he was entitled to a refund on his 2016 tax return
because: (1) he subjectively believed that he had an “unrestricted right” to
the income he earned in 2007-2014; and (2) his restitution payment was
eligible for deduction under § 162(a). We disagree and deny him relief.
Section 1341 “allows an income tax deduction to a taxpayer who
previously received taxable income under a claim of right, but who must later
repay some or all of that income.” Estate of Smith v. Comm’r, 198 F.3d 515,
526 (5th Cir. 1999) (emphasis omitted). While § 1341 has numerous
requirements, only two are pertinent to the instant appeal. First,
under § 1341(a)(1), an item must be “included in gross income for a prior
taxable year (or years) because it appeared that the taxpayer had an
unrestricted right to such item[.]” Second, as we explained in Wood v. United
States, § 1341 “only applies where the taxpayer is entitled to a deduction
under another provision of the tax code.” 863 F.2d 417, 420 (5th Cir. 1989)
(citing United States v. Skelley Oil Co., 394 U.S. 678, 683 (1969)).
Regarding § 1341(a)(1)’s “unrestricted right” prong, we have expressly
recognized that when the item at issue is “embezzled funds[,] it is clear that
it could not appear to the taxpayer that he had any right to the funds, much
less an unrestricted right to them.” McKinney v. United States, 574 F.2d 1240,
1243 (5th Cir. 1978) (internal quotations omitted).
Preliminarily, we examine our decision in McKinney. See 574 F.2d at
1240. There, a taxpayer sought a refund after reporting and paying taxes on
funds he obtained by embezzling money from his employer, the Texas
Employment Commission. Id. at 1241. He relied on § 1341 as the basis for his
entitlement to a refund for the taxes he paid. Id. A panel of this court reasoned
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that because § 1341 was enacted before embezzled funds could be legally
counted as reportable income, Congress could not have intended to “give the
benefits of [§ 1341] to holders of embezzled funds.” Id. at 1243. We have
upheld that logic in subsequent cases. See, e.g., Wood, 863 F.2d at 420(explaining that the “unrestricted right” prong cannot be satisfied where
funds were fraudulently obtained). Under this backdrop, we proceed to
Gross’s claims.
Gross contends that the district court’s reliance on McKinney is
misplaced because this case does not involve embezzled funds, and he paid
taxes on the income he earned. He also argues that his subjective belief that
he had an unrestricted right to the income he earned through 2007 and 2014
satisfies § 1341’s first prong. To evince his subjective belief, he highlights
that from 2007 through 2014, he: (1) maintained an active Medicare license;
(2) treated and billed patients; and (3) reasonably believed that he was
entitled to the funds he received.
Our case law does not foreclose Gross’s argument that we should look
to his subjective belief that he had an unrestricted right to the funds he made
from 2007 to 2014. In Wood, this court expressed its “reluctan[ce] to hold
that a wholly subjective test of a claim of right to ill-gotten gains
governs § 1341(a)(1).” 863 F.2d at 420. Instead, the panel recognized that
even if the plaintiff “prevailed on his theory that McKinney is distinguishable
or must be overruled, he must then furnish another statutory source for a
deduction” in accordance with § 1341’s second prong. Id. Ultimately, the
panel concluded that the plaintiff failed to provide another statutory source,
as the second prong required. So, rather than address whether McKinney
remained good law or if prong one warranted a subjective inquiry, the panel
decided the case on § 1341’s second prong. Like in Wood, Gross fails § 1341’s
second prong, so we need not weigh his arguments on the first prong.
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Section 162(a) permits a taxpayer to deduct “all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on
any trade or business.” See id. (1975). In turn, C.F.R. § 1.162-21(b)(1)(i)
provides that a “fine or similar penalty” includes amounts “[p]aid pursuant
to . . . a plea of guilty . . . for a crime (felony or misdemeanor) in a criminal
proceeding[.]” According to Gross, the Government conceded that his
business expenses between 2007 and 2014 were ordinary and necessary to his
practice, so he is entitled to a deduction under § 162(a). In response, the
Government points to § 162(f), which prohibits deductions “for any fine or
similar penalty paid to a government for the violation of any law.” See id.
(2012). It asserts that because Gross has not pleaded an alternate deduction
to which he would be entitled, his claim fails. We agree.
Here, Gross is not entitled to a tax refund because § 162(f) disqualifies
him from a deduction under § 162(a). The district court ordered Gross to
forfeit his property and use it for restitution payments. See 18
U.S.C. § 982(a)(7) (providing that a district court, “in imposing sentence on
a person convicted of a Federal health care offense, shall order the person to
forfeit property, . . . that constitutes or is derived . . . from gross proceeds
traceable to the commission of the offense”). Its order stemmed from his
guilty plea, where he expressly agreed to pay restitution for his fraudulent
behavior. His restitution order squarely falls within the legal definition of a
“fine or similar penalty.” See C.F.R. § 1.162-21(b)(1)(i).
Consequently, § 162(f) disqualifies him from a deduction under § 162(a).
Because Gross is not “entitled to a deduction under another provision of the
tax code,” he fails § 1341’s second prong and has not stated a plausible claim
for his requested tax refund. Wood, 863 F.2d at 420; Iqbal, 556 U.S. at 678.
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IV. Conclusion
For the foregoing reasons, we AFFIRM the district court’s dismissal
of Gross’s claim for a tax refund.
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