The opinion of the court was delivered by: PLATT
This is an action for the refund of federal income taxes in which the plaintiff has asserted alternative grounds for relief.
Defendant, Internal Revenue Service ("IRS"), has moved pursuant to Rule 12 of the Federal Rules of Civil Procedure, to dismiss the above-titled action on the grounds that defendant is entitled to judgment on the pleadings with respect to Count One of the complaint and that this Court lacks subject matter jurisdiction over Count Two of the complaint.
The facts, which for purposes of this motion, we assume to be true, are taken from the plaintiff's complaint and are as follows:
The plaintiff, Samuel Pearson, in 1951 became a stockholder in the Dreyfus Corporation, which corporation was the investment advisor and underwriter of The Dreyfus Fund, Incorporated, a mutual fund. (Compl. par. 8 and 9). In October, 1965, the stockholders of The Dreyfus Corporation sold the bulk of the shares in the corporation. (Compl. par. 10). At the time of this sale, the plaintiff owned 5.19% of the stock, and his share of the proceeds of the sale totalled $2,287,371.30. (Compl. par. 11). The plaintiff reported the sale on his 1965 income tax return as a long term capital gain, and paid the tax thereon. (Compl. par. 12).
In April, 1968, several shareholders of The Dreyfus Fund, Incorporated, brought suit against the plaintiff and the other shareholders of The Dreyfus Corporation, alleging, in part, that these corporate shareholders should be required to account for the unlawful proceeds of the stock sale. (Compl. par. 13). This action was tried in 1971, but prior to a decision being rendered, the parties entered into a Stipulation of Settlement, under which the corporate shareholders would pay $5,000,000 to the fund shareholders. (Compl. par. 14, 15 and 16). Plaintiff's pro rata share of this settlement was $279,000, which amount he paid in 1971. (Compl. par. 19). The settlement was approved in a decision by the United States District Court, Newman v. Stein, CCH Fed.Sec. L. Rep. P 93,316 at 91,718 (S.D.N.Y. 1971) (McLean, J.) which was affirmed by the Court of Appeals for this Circuit, Newman v. Stein, 464 F.2d 689 (2d Cir.) (Friendly, C.J.), cert. denied, 409 U.S. 1039, 93 S. Ct. 521, 34 L. Ed. 2d 488 (1972).
Plaintiff apparently did not report the $279,000 payment in any manner on his 1971 income tax return but on the audit thereof the IRS auditing agent, for reasons which are not disclosed in the papers before this Court, "gave" the plaintiff credit for the payment as a long term capital loss.
The plaintiff contends, that the $279,000 payment should properly be treated as an ordinary loss rather than a long-term capital loss. This treatment, according to the plaintiff, results in a net operating loss which he may carry-back to 1968, resulting in a refund due for that year. Plaintiff has timely filed a claim for refund for 1968 asserting this position. Alternatively, plaintiff claims that he may compute his tax for the 1971 year under the mitigation provisions of Section 1341 of the Internal Revenue Code ("IRC"). (Compl. par. 31).
As to plaintiff's first contention above, the defendant IRS has moved to dismiss it on the grounds that they are entitled to judgment on the pleadings. This Court has already denied this portion of defendant's motion on the grounds that plaintiff raised the possibility that some portion of the 1971 settlement payment might have been in satisfaction of other claims in the litigation not related to the original 1965 sale of securities and thus not subject to the doctrine of Arrowsmith v. Commissioner, 344 U.S. 6, 97 L. Ed. 6, 73 S. Ct. 71 (1952). This possibility could not be dismissed by the Court and thus the Court denied this portion of defendant's motion, indicating that further discovery was required solely to determine to what extent the settlement did not reflect repayment on the claims related to the 1965 sale. In this regard, the Court notes that the Second Circuit, in affirming the settlement in question, Newman v. Stein, supra, strongly suggests that the settlement related substantially, if not wholly, to the claims arising out of the original securities sale. This Court does not intend to repeat the work of the Second Circuit in this regard and thus considers it plaintiff's burden to provide probative evidence rebutting these conclusions by the Second Circuit. No further discussion of this facet of defendant's motion is necessary at this time.
Defendant IRS also moves to dismiss Count Two of plaintiff's complaint, which claims that he should be allowed to compute his tax for the 1971 year under the mitigation provisions of Section 1341 of the IRC, on the grounds that this Court lacks subject matter jurisdiction due to ...