United States District Court, E.D. New York
May 2, 2005.
JOSEPH CARIONE, Plaintiff,
UNITED STATES OF AMERICA, Defendant.
The opinion of the court was delivered by: DENIS HURLEY, District Judge
MEMORANDUM & ORDER
INTRODUCTION Plaintiff Joseph Carione filed suit against the United States,
seeking a refund of income tax that he claims to have paid
erroneously, and both parties moved for summary judgment. This
Court held that the proceeds of Carione's 1998 sale of his
business assets, held in escrow and then directly transferred to
the Government in 2000 to satisfy an outstanding forfeiture
judgment, constituted taxable income to him, but only in 2000,
the year of the actual forfeiture. The Government now moves for
reconsideration and alteration or amendment of the previous
decision, arguing that because the escrow account in question was
interest-bearing, "Plaintiff obtained an economic benefit from
the proceeds in 1998, and thus they were properly included in his
1998 taxable income." For the reasons that follow, the
Government's motion is DENIED.
The facts and proceedings underlying the present dispute were
summarized in previous opinions, and need not be thoroughly
restated. For present purposes, it is sufficient to note that
Carione and Grand Carting, Inc. ("Grand Carting"), Carione's
wholly-owned "S Corporation" were indicted for, and later pleaded
guilty to, money laundering, money laundering conspiracy, and
other crimes under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. § 1961, et seq. See
generally United States v. Hickey, et al., 96-CR-693. Carione
subsequently sold Grand Carting's assets, and the sale proceeds
were deposited in an escrow account with the Court, to be used to
satisfy an upcoming forfeiture judgment. As the Government has
noted, although these funds were at first placed in a non-interest-bearing escrow account, they were soon
transferred to an interest-bearing account. On August 9, 2000,
the proceeds of the sale of Grand Carting were used to satisfy
the forfeiture judgment.
In September 2000, Carione paid his 1998 federal income taxes,
including $49,400 in taxes on the Grand Carting sale. Carione
subsequently filed the present lawsuit, claiming that his gains
from the sale of Grand Carting should not have been included in
his taxable income. On March 17, 2005, upon both sides' summary
judgment motions, this Court held that (1) the Grand Carting sale
proceeds did not constitute taxable income to Carione during the
years that they were held in escrow (1998 and 1999), but (2)
their use to satisfy the forfeiture judgment in 2000 constituted
an economic benefit, and thus taxable income, to Grand Carting
and (3) thus to Carione, as its sole shareholder, in that year.
The Government subsequently submitted the present motion for this
Court to reconsider and alter or amend the first portion of that
I. Reconsideration and Alteration: Legal Standards
The Government's motion is submitted pursuant to Local Civil
Rule 6.3 and Federal Rule of Civil Procedure 59(e). Rule 59(e)
motions to alter or amend a judgment are considered under
essentially the same standard as Local Rule 6.3 motions for
reconsideration. Laxer v. NBA Properties, Inc., No. 96 Civ.
4449, et al., 1998 WL 372475, at *1 (E.D.N.Y. Apr. 28, 1998).
This standard is "strict." Shrader v. CSX Transp., Inc.,
70 F.3d 255, 257 (2d Cir. 1995). Such motions are committed to the "sound discretion
of the district court," see McCarthy v. Manson, 714 F.2d 234,
237 (2d Cir. 1983), and the burden is on the movant to
demonstrate that the Court overlooked controlling decisions or
material facts that were before it on the original motion, and
that might "materially have influenced its earlier decision."
Anglo Am. Ins. Co. v. CalFed, Inc., 940 F. Supp. 554, 557
(S.D.N.Y. 1996). The movant may neither repeat "arguments already
briefed, considered and decided," nor "advance new facts, issues
or arguments not previously presented." Schonberger v. Serchuk,
742 F. Supp. 108, 119 (S.D.N.Y. 1990) (citations omitted). Rather
he must "point to controlling decisions or data that the court
overlooked matters, in other words, that might reasonably be
expected to alter the conclusion reached by the court."
Shrader, 70 F.3d at 257.
When reconsidering a prior summary judgment determination, a
district court must be cognizant of the underlying legal
standards governing summary judgment. See, e.g., Senich v.
American-Republic, Inc., Nos. 99 Civ. 1382 & 99 Civ. 1603, 2001
WL 34084380, at *4 (D. Conn. March 27, 2002). Summary judgment is
appropriate when, drawing all factual inferences in favor of the
party opposing summary judgment, there is no genuine issue as to
any material fact and the moving party is entitled to a judgment
as a matter of law. See Fed.R.Civ.P. 56(c); Celotex Corp.
v. Catrett, 477 U.S. 317, 323 (1986); Donahue v. Windsor Locks
Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir. 1987); and Rule
v. Brine, Inc., 85 F.3d 1002, 1011 (2d Cir. 1996).
II. The Government Fails To Offer Adequate Grounds for
Reconsideration or Alteration of the Previous Judgment. As the Government suggests, this Court's March 17, 2005
Memorandum and Order did not "focus on" the tax consequences of
the interest-bearing nature of Carione's escrow account. That
does not, however, indicate that the Court "overlooked" the
issue. Rather, the dearth of discussion on this issue reflects
both the fact that the parties themselves did not focus on it, as
well as this Court's implicit determination that the issue is
inconsequential and unworthy of substantial discussion.
"Taxation is not so much concerned with the refinements of
title as it is with actual command over the property taxed the
actual benefit for which the tax is paid." Corliss v. Bowers,
281 U.S. 376, 378 (1930). The March 17, 2005 Order noted that
funds deposited into an escrow account on a taxpayer's behalf are
generally excluded from his taxable income, so long as the escrow
account is bona fide and not under the taxpayer's control, and so
long as the taxpayer "receives no present beneficial interest"
from the funds while they are in escrow. Since Carione was unable
to withdraw, transfer, or spend any of the escrowed Grand Carting
sale proceeds, this Court reasoned that he received neither
control, nor any form of present beneficial interest from those
funds while they were held in escrow in 1998 and 1999. This
analysis was primarily based on Reed v. Commissioner,
723 F.2d 138, 149 (1st Cir. 1983).
The Government does not argue that Carione could have
withdrawn, transferred, or spent the interest earned on the sale
proceeds of Grand Carting's assets prior to satisfaction of the forfeiture judgment.*fn1 Rather, the Government's
sole argument is that merely by being placed in the
interest-bearing escrow account in 1998, the sale proceeds were
"put to work for the Plaintiff's benefit," and thus were taxable
to him as income in that year, despite the fact that he had no
control over the account. Carione does not dispute that the
escrow account was interest-bearing, but he argues in opposition
that since he had no more control over the accruing interest than
he had over the principal, he obtained no benefit from the
account in 1998. Carione is correct.
There is no dispute that the accrued interest on funds held in
escrow, like the funds themselves, is taxable as income in the
year that it actually offers the taxpayer some economic benefit.
See, e.g., Koehn v. Comer, No. 97 Civ. 76328, 2003 WL 1735496,
at *1 (E.D. Mich. Feb. 19, 2003). For example, the use of such
interest to reduce the taxpayer's previous tax liabilities
constitutes taxable income. See id. However, the Government
points to no case that, when fairly read, indicates that merely
because an escrow account is interest-bearing, the deposit of
funds into that escrow account constitutes a presently-taxable
economic benefit. In fact, the cases cited by the Government
indicate that the opposite is true.
In Reed v. C.I.R., 723 F.2d 138 (1st Cir. 1983), the First
Circuit rejected the proposition that a taxpayer's "unconditional
right to future payment from an irrevocable escrow account"
constituted "taxable income in the year the escrow account was
created"; the Court instead stressed that what mattered for
taxability purposes is whether the taxpayer "received a present beneficial interest in the escrow funds," in that they
were the equivalent of investment income. See generally id. As
the Government argues, Reed distinguished the First Circuit's
prior holding in Kuehner v. Commissioner, 214 F.2d 437 (1st
Cir. 1954). However, neither Reed nor Kuehner supports the
Government's broad contention that "the taxpayer received a
present, beneficial interest in the escrow funds in 1998 when the
escrow funds were invested and began working to accrue interest
for his benefit."
As the court explained in Reed, under the escrow agreement at
issue in Kuehner, interest accruing on invested escrow funds
was effectively payable to the petitioner as it accrued, and thus
the "taxpayer's interest in the escrowed funds constituted a
property interest equivalent to cash," and he "enjoyed a complete
and present economic interest in the funds." The funds
transferred into the escrow account in Kuehner were accordingly
held to be taxable as income in the year of their transfer.
Reed, 723 F.2d at 146 (citing Kuehner, 214 F.2d at 440). In
Reed, by contrast, the taxpayer did not receive any "present
beneficial interest" in income earned from the investment of
funds held by the escrowee, but "merely obtained an unconditional
promise that he would ultimately be paid."*fn2 Similarly, in
the present case the Government has offered no indication that
the interest on Carione's escrowed funds was payable to him as it accrued; it has instead implicitly endorsed
Carione's argument that the interest was given the same treatment
as the principal that is, it was placed in escrow beyond
Carione's reach at least until its use in satisfying his
outstanding forfeiture obligations in 2000.
The common-sense notion that interest accruing on escrowed
funds is not taxable until it actually bestows some tangible
economic benefit upon the taxpayer finds explicit support in
Stone v. Commissioner, 47 T.C.M. (CCH) 1502, 1984 WL 14442
(April 16, 1984). In that case, the Tax Court rejected the
Government's contention that interest on escrowed property is
taxable as income in the years in which it accrues, and instead
stressed that because this interest "was not set apart for or
made available to" the taxpayer in those years, the taxpayer did
not actually or constructively receive the interest as income.
If, as previously established, money placed in bona fide escrow
is not presently taxable to its eventual recipient, and if, as
indicated by Stone, interest earned on that principal sum is
similarly not presently taxable, then it seems patently illogical
to suppose that the entire presently untaxable escrowed sum
becomes presently taxable merely by the accrual of presently
untaxable escrowed interest.
In sum, the Government has failed to demonstrate that this
Court overlooked any controlling decisions or material facts that
were before it on the previous motions, and that might have
materially influenced its earlier decisions on those motions.
For all of the reasons above, the United States's motion for
reconsideration and alteration is DENIED.