Powell v. United States ( 2016 )

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No. 10-3817
(Filed March 15, 2016)
NOT FOR PUBLICATION
FILED
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MAR | 5 2016
U.S. COURT OF
LUCY HAMRICK POWELL and FEDERAL CLAIMS
JAMES CLEMENT POWELL,
Plaintiffs,
v.
THE UNITED STATES,
Defendant.
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MEMORANDUM OPINION AND ORDER
WOLSKI, Judge.
Pending before the Court is defendant's motion for summary judgment
pursuant to RuIe 56 of the Rules of the United States Court of Federal Claims
(RCFC). For the reasons set forth below, the Court finds that plaintiffs have no
evidence to support their claims that their 2004 Individual Retirement Account
(IRA) withdrawals were non-taxable events entitling them to a partial refund of
their 2004 federal tax payments. Defendant's motion for summary judgment is
GRANTED.
I. BACKGROUND
A. Tax Refund Claim
James Clement PoweII and Lucy Hamrick Powell are spouses and pro se
plaintiffs who run an energy business in Virginia. Plaintiffs timeiy filed their 2004
joint federal tax return on August 4,2005 (following an extension from the IRS)'
Def.'s Mot. to Dismiss, Ex. 1. In their 2004 tax return, plaintiffs Iisted $78,000 in
IRA distributions as income. 1d. Plaintiffs allege that these distributions were
rolled over into another retirement account, making them non-taxable. PIs.'Resp.
to Mot. for Summ. J. (PIs.' Opp'n) at 2.
Plaintiffs' 20O4 tax liability totaled $77,648.00. Def.'s Mot. to Dismiss, Ex. 1.
Plaintiffs paid their 2004 federal tax liability, including penalties, in multipie
installments as follows: $10,000 with their return on August 4, 2005: $35,000 on
December 22,20O5; $10,000 on February I7, 2006: and, $9,000 on April 2I,2006.
Def.'s Mot. to Dismiss, Ex. 2. Plaintiffs also had several "overpayment credits"
applied to their tax obligation as follows: $1,856.77 on April 15, 2005; $8,739.38 on
September 22,2005; $10,000 on JuIy 6,2006; and, $356.28 on November 6, 2006.
Id.
On August 26,2008, plaintiffs fiIed an amended 2O04 tax return claiming an
overpayment of $25,131.00 due to the erroneous categorization of their IR.A'
distributions as income. Attach. 1 to Compl. Plaintiffs claimed that they rolled
their IRA distributions into a commercial real estate investment and that this
constituted a non-taxable event. Compl. at I; see 26 U.S.C. S 408(dX3) (rollover
contribution requirements).
The Internal Revenue Service (IRS) rejected plaintiffs' amended 2004 return
because it was filed more than three years after the due date oftheir original return
and thus outside of the allowable look-back window. Attach. 2 to Compl. Plaintiffs
appealed this rejection to the IRS's Richmond, Virginia Appeals office. See Att. 5 to
id. In their appeal, plaintiffs attached a copy ofa check made payable to the IRS for
$12,567.00 dated October 28,2006, and argued that since this payment was made
within two years of their August 26,2008 amended return it fell within the two'
year look-back period under 26 U.S.C. S 6511(b). Attachs. 3, 5 to id. Plaintiffs'
appeal was denied without substantive explanation. Attach. 5 to id.
B, Procedural History
Plaintiffs fiIed a complaint with the Court on June 18, 2010, seeking 842,344
for the "overpayment of 2004,2006,2OO7 and 2008 federal income taxes." Compl. at
1. On March 24, z}Llplaintiffs agreed to dismiss the clains related to tax years
2007 and 2008 as they were referenced in the complaint only to acknowledge offsets
affecting the 2006 tax year. See Order, Mar.24,2011, ECF No. 17. The Court also
later held that plaintiffs' 2004 claims were limited to $20,952.43, based on
overpayments and credits within the look-back window. Order, Aug. 7,2012,ECF
No. 29. At a status conference held on April 17, 2013, plaintiffs orally moved to
dismiss their claim related to the 2006 tax year. See Order, Apr. 23, 2013, ECF No.
40. Thus, by May 2013 --- following various motions and hearings, which do not
directly involve the question before the Court --- the only remaining claim before the
Court was that plaintiffs' alleged 2004 $78,000 IRA rollover was a non-taxable
event entitline them to a refund of 2O04 federal income taxes.
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On May 11, 2013, following a court order, plaintiffs provided discovery
responses to the government. Def.'s Mot. for Summ. J. (Def.'s Mot.), App. 1.
Defendant filed a motion for summary judgment, arguing that plaintiffs' complaint
and discovery responses provided no evidence that their 2004 IRA distributions
were non-taxable events. Id. at 4. The government maintains that summary
judgment is in order under RCFC 56(a), as plaintiffs cannot show a genuine dispute
as to any material facts. See id. at 3-4 (citing Thomas u. United States, 56 Fed. CI.
112, 116 (2013)).
Plaintiffs were permitted to belatedly file a response to defendant's motron
for summary judgment. See PIs.' Opp'n. In this document, they argued that the
$78,000 withdrawn from their IRAs was rolled over to something they called a
"Business Owners Retirement Savings Account." Id. at 2. Defendant replied in
support of its motion for summary judgment, arguing that "plaintiffs cannot
produce evidence showing that the real estate investment in question meets the
strictures of a qualifiiing IRA under [26 U.S.C.] $ 408." Def.'s Rep. in Supp. of Mot.
for Summ. J. (Def.'s Reply) at 1-2. The government added that, even if plaintiffs'
claims were construed to be based on a one-participant retirement plan under 26
U.S.C. 5401, plarntiffs had failed to produce evidence supporting the existence of
such a plan. Id, at 3-6. Plaintiffs were then allowed a sur-reply, in which they
stated the dates ofthe initial IRA withdrawals, and the date of their commercial
real estate purchase. Pls.'Sur-Reply to Mot. for Summ. J. at 2, June 6, 2014, ECF
No. 51.
Shortly before the Court held a hearing on defendant's motion, plaintiffs
submitted copies ofsix exhibits they intended to rely upon at the hearing, including
a checking account statement with handwritten notations indicating when the two
IRA distributions were deposited. See Sched. 5 to Pls.'Exs., March 19, 2015, ECF
No. 55. In light of plaintiffs' pro se status, the Court granted leave to file these
exhibits. Order, Mar. 19, 2015, ECF No. 54. At the conclusion of the hearing, the
Court announced that summary judgment would be entered in defendant's favor,
and this opinion memorializes that ruling.
II. DISCUSSION
A. Applicable Legal Standards
Summary judgment shall be granted when "the movant shows that there is
no genuine dispute as to any materiai fact and the movant is entitled to judgment
as a matter of law." RCFC 56(a); see Celotex Corp. u. Cdtrett, 477 U.5. 3I7, 322-23
(1986); Anderson u. Liberty Lobby, Inc., 477 U.5.242,247-48 (1986); Sroeols
Fashions, Inc. u. Pannill Knitting Co., 833 F.2d 1560, 1562-63 (Fed. Cir. 1987);
Tecom, Inc. u, United,States,66 Fed. CI.736,743 (2005). Material facts are those
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"that might affect the outcome of the suit under the governing law." Liberty Lobby,
477 U.S. at 248. A dispute over facts is genuine "if the evidence is such that a
reasonable [factfinder] could return a verdict for the nonmoving party." 1d.
The moving party may base its motion for summary judgment on the
"absence of evidence to support the nonmoving party's case." Celotex Corp., 477
U.S. at 325. For its part, the non-moving party is not obliged to "produce evidence
in a form that would be admissible at trial" in order to demonstrate the existence of
a genuine issue of material fact. Id. at 324. If the non-moving party's evidence is
"merely colorable, or is not significantly probative, summary judgment may be
granted." Liberty Lobby, 477 U.S. at 249-50 (citations omitted); Veit & Co. u.
United States, 56 Fed. Cl. 30, 34 (2003). "The party opposing the motion must point
to an evidentiary conflict created on the record; mere denials or conclusory
allegations are insufficient." SRIInt'lu. Matsushita EIec. Corp. of Am.,775F.2d
1107, 1116 (Fed. Cir. 1985) (citation omitted); see also Veit,56 Fed. Cl. at 34.
B. The IRA Distributions Were Not Placed in a Valid Retirement Plan
The basis of plaintiffs' claim is that the IRS should not have classified the
2004 IRA distributions of $78,000 as income and, therefore, taxable because they
were rolled into another IRA. To prevail on their claim, plaintiffs needed to
demonstrate the existence ofthe IRA through which the funds were invested.l An
IRA requires, among other things, a written plan and designation of an appropriate
trustee. 26 U.S.C. $ 408(a); see also 26 C.F.R. S 1.a08-2(b); Schoof u. Commisstoner,
110 T.C. 1, 7-8 (1998); Cobb u. Commissioner, 77 T.C. 1096, 1099 (1981).
The government requested from the Powells documentation of the existence
ofthe IRA which allegedly received the distributions, and specifically sought its
written plan and the identity of the trustee. Defs Mot. to Compel, Ex. 2, March 12,
2013, ECF 33. In response, the PoweIIs did not produce a written plan for the IRA
or the name of the IRA's trustee. Not only have the Powells failed to identifu any
support for the existence ofthe IRA through which the $78,000 in IRA distributions
were allegedly invested, at oral argument Mr. Powell conceded that there was no
written agreement and no trustee. Mister Powell admitted that the Powells
purchased the property in their individual capacities and held it individually until
' The government also argued that plaintiffs failed to show that the IRA
distributions were rolled over within the required 60 day time period. Viewing the
evidence in the light most favorable to the non-moving party, however, the
"rollover" ofthe funds could have been within the 60 day period. The IRA
distributions (as shown on plaintiffs'bank statements) were made on November 23
and December 8, and the purchase ofthe property was on December 10. See
Scheds. 4-5 to Pls.' Exs., March 29,2015, ECF 55. Thus, hadthe purchase ofthe
property constituted a valid rollover, it could have been timely.
2012, when it was sold to a corporation. The property has never been held in trust
or in an IRA account. Mister Powell's understanding was merely that any money
withdrawn from an IRA and invested in a business still counted as being in an IRA.
To this end, plaintiffs argued that their IRA distributions were used in
something called a BORSA, or "Business Owners Retirement Savings Account,"
which they claimed need not be reported until the plan terminates due to the small
size of the rollover, under IRS Form 5500. Pls.' Opp'n at 2. Apparently, BORSA is
a trade name for a type of vehicle the IRS calls "ROBS" or a "rollover as business
startup." The IRS views a ROBS as a questionable, but not necessarily abusive,
mechanism for individuals to roll retrrement funds into a new business. I.R.S.
Memo, Guidelines Regarding Rollovers as Business Start-Ups (Oct. 1, 2008),
available at https://www.irs.gov/pub/irs-tege/robs-guidelines.pdf. The IRS has
stated that a ROBS may work as a legitimate tax planning entity but recommends
assessment on a case-by-case basis through IRS determination letters. Id. The
steps generally to create a ROBS are as follows:
1. The individual creates a new corporation for the purpose of running a
qualified retirement plan.
2. The new corporation creates a qualified employee retirement plan and
allows participants to invest in the plan through corporate stock.
a The individual becomes an employee ofthe corporation and enrolls in the
pIan.
A
The individual either conducts a rollover or direct trustee-to'trustee
transfer offunds from a qualified personal IR.A or previous employer's
$ 401 plan into the new corporate retirement plan.
The individual directs his account balance in the qualified retirement plan
to purchase employer stock.
o. The individual then uses the transferred funds to begin a business
enterDrlse.
Id. Plaintiffs conceded that they did not follow these required, formal steps.2
The government is correct that, under 26 U.S.C. $ 401 and its implementing
regulations, "one participant retirement plans" need written trust instruments and
certain other formalities. See Def.'s Reply at 4-6 (citing, inter alia,26 U.S.C. S
4OI(a);26 C.F.R. S 1.401-1(a)(2)). But, as was discussed above, the Powells did not
have a written plan. And while it may be true that one participant plans with less
2 No corporation was created for purposes of running a qualified retirement plan.
Prospect HilI Enterprise LLC, an entity which appears to currently hold title to the
property, was created in 2012. See Sched. 6 to PIs.' Exs., March 29,2075, ECF 55.
Not having existed when the IRA distributions were made and the proceeds
reinvested, this entity could not have played a role in a ROBS transaction.
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than $250,000 worth of assets are not required to file annual reports until therr
final year of existence, see 29 U.S.C. $ 1365, Pensions and Welfare Plans Required to
File Annual Report / Return, IRS, https://www.irs.gov/instructions/i550OsflchO1.html
(last visited March 15, 2016), to be plans in the first place such entities need trust
instruments, see 26 U.S.C. S 401(a), and "a definite written program and
arrangement," 26 C.F.R. 5 1.401-1(a)(2). With no written plan in existence under
which the IRA distributions were reinvested, the arrangement could not have
employed a qualified trust under 26 U.S.C. S 401.
Not only is there no genuine dispute of material fact, but there is no dispute
on this point, period. At oral argument, Mr. Powell conceded that while he had a
business plan concerning the real estate he purchased with the IRA distributions, a
written plan for an IRA through which the investment was made did not exist.
Plaintiffs withdrew money from IRAs to purchase land in their individual
capacities, and the land was not purchased through or held by another IRA. As no
IRA existed into which plaintiffs could have rolled the 2004 IRA distributions, the
IRS properly classified the distributions as income. Accordingly, plaintiffs are not
owed a partial refund of their 2004 federal income taxes, and defendant is entitled
to judgment as a matter of law.
III. CONCLUSION
For the reasons stated above, defendant's motion for summary judgment
under RCFC 56(a) is GRANTED. The Clerk shall enter judgment accordingly. No
costs shali be awarded.
IT IS SO ORDERED.
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