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Lpciminelli Interests, Inc v. United States of America

November 13, 2012


The opinion of the court was delivered by: John T. Curtin United States District Judge


In this action, plaintiff LPCiminelli Interests, Inc. ("LPCiminelli") seeks a refund of approximately $1.2 million in tax paid for the year 2004 which it claims was incorrectly assessed by the Internal Revenue Service ("IRS") on income arising from a purported cancellation of the indebtedness of an inactive wholly-owned subsidiary. At the conclusion of discovery, and following an unsuccessful attempt at mediation, the parties requested a bench trial to resolve certain factual disputes, and the court set a schedule for trial and final pretrial submissions. In accordance with that schedule, the parties submitted a "Proposed Stipulation of Facts" (Item 37), followed by pretrial statements and lists of anticipated witnesses and exhibits (Items 41-44). The government also filed a motion in limine to preclude certain witnesses from giving testimony at trial (Item 48).*fn2

Subsequently, the parties submitted a "Trial Record Stipulation" reflecting their mutual agreement to stipulate into evidence a complete trial record in lieu of a live trial. Item 57. The stipulated record consists of the prior Stipulation of Facts ("SF"), along with documentary exhibits and deposition testimony submitted to the court in three bound "Volumes." Volume I contains Trial Exhibits ("TE") 1-19; Volume II contains excerpts from the deposition transcripts of James Sciarrino and Louis Ciminelli;*fn3 and Volume III contains Trial Exhibits 20-26 and excerpts from the deposition transcript of IRS agent David M. Throm. The parties have stipulated that the evidence contained in Volumes I and II is admissible and part of the trial record. The evidence contained in Volume III is subject to the government's pending motion in limine, discussed at further length below.

The parties have also filed proposed findings of fact and conclusions of law (Items 60-61), responses (Items 63, 64), and replies (Items 67, 69, 70), and oral argument was heard by the court on September 26, 2012. The following constitutes the court's findings and conclusions based on the stipulated trial record, in accordance with Rule 52 of the Federal Rules of Civil Procedure.*fn4


LPCiminelli is a Delaware corporation with a principal place of business in Buffalo, New York. At all relevant times, LPCiminelli owned one-hundred percent of the stock of the Cowper Construction Company ("Cowper"), which was formed under the laws of Delaware in January 1996 to engage in the construction business in the Carolinas. Cowper was a member of a group of companies owned by LPCiminelli and consolidated for tax reporting purposes. SF ¶¶ 8-10.

Cowper ceased operations some time before December 31, 2003. The exact date is in dispute. Balance sheets reflect that by the end of 2003, Cowper held only $63 in cash; had no fixed assets; held no accounts receivable; and had an accounts payable balance in the amount of $3,495,977, consisting of subcontractor and vendor claims arising out of Cowper's construction projects. TE 1. Cowper began to incur these debts in 1997, and received the last invoice with respect to these debts in 2002. The $3,495,977 accounts payable balance remains unpaid. SF ¶¶ 11-12.

LPCiminelli reported Cowper as an active subsidiary on its Form 1120 consolidated federal corporate tax returns for tax years 2000-2003 (see TE 1, 4-7). On its consolidated federal corporate income tax return for tax year 2004, filed on September 12, 2005 (TE 3), LPCiminelli reported that Cowper was insolvent, inactive, and had negative equity as of December 31, 2003, and that LPCiminelli's retained earnings had been adjusted to reflect the removal of Cowper from the consolidated filings. Id. at Bates No. IRS00439; SF ¶ 16.

The IRS subsequently conducted an audit of LPCiminelli's 2004 tax return, which took place in late 2006 and early 2007. During the audit, plaintiff's counsel informed the auditors that Cowper had disposed of substantially all of its assets before tax year 2004 "within the meaning of the consolidated return regulations (Treas. Reg. §1.1502-19(c)(1)(iii)(A))." TE 10. Plaintiff's corporate representative also signed a Form 872 "Consent to Extend the Time to Assess Tax," dated November 15, 2006, by which plaintiff agreed to extend and leave open the statutes of limitations on tax years 2001-2003 so that any federal income tax due on plaintiff's returns for those years "may be assessed at any time on or before December 31, 2007." TE 11; SF ¶¶ 20-25.

On March 16, 2007, after completing the audit, the IRS issued a Form 5701 Notice of Proposed Adjustment directing LPCiminelli to include Cowper's $3,495,977 of unpaid accounts payable as cancellation of indebtedness ("COD") income for 2004. TE 13. On or about July 27, 2007, following notification from counsel that it disagreed with this conclusion (TE 12), LPCiminelli submitted an executed Form 5701 to the IRS tendering the amount of $1,188,632, plus interest of $219,537.16, as full payment of the additional tax assessed on income based on cancellation of Cowper's indebtedness. SF ¶¶ 26-28.

On or about August 4, 2008, LPCiminelli submitted a Form 1120X amended consolidated tax return seeking a refund of the $1,188,632,*fn5 plus interest. LPCiminelli asserted that it was entitled to a refund because, under the tax code and its implementing regulations, the COD income realized by Cowper should have been excluded from the consolidated taxpaying group's gross income to the extent of Cowper's insolvency. SF ¶¶ 29-30.

On March 25, 2009, having received no response to its refund demand, LPCiminelli filed this lawsuit. The government answered the complaint by generally asserting that the additional $1,188,632 was properly assessed as tax on COD income for tax year 2004. See Item 8. However, as reflected in the parties' submissions, the government now agrees with LPCiminelli that this additional tax was erroneously assessed on the basis of COD income. Instead, the government now contends that the assessment was proper as a tax on income arising from an excess loss account ("ELA") relating to Cowper, thereby offsetting the erroneous COD income tax assessment. SF ¶ 35. Plaintiff responds that the undisputed evidence shows that the ELA issue was addressed by LPCiminelli during the 2004 audit, and was pursued by the IRS, but the audit team concluded that LPCiminelli had not realized ELA income in 2004.

As previously mentioned, plaintiff has designated as trial evidence portions of the transcript of the deposition of IRS auditor David Throm, taken in this matter on December 15, 2009, and has identified as trial exhibits several emails, draft Notices of Proposed Adjustment, and other documents pertaining to the facts considered and matters pursued by the audit team, which included Mr. Throm's supervisor Kathleen Oswald and IRS Attorney Matthew Root. By its motion in limine, the government seeks to preclude plaintiff from offering the designated deposition testimony of Mr. Throm, and to exclude as exhibits any documents or emails reflecting internal agency deliberations and conclusions regarding the audit. According to the government, any testimony or documentary evidence concerning the actions of IRS employees involved in the audit is of no relevance to the court in its role as the finder of fact as to the propriety of the tax assessment.


I. Standard of Review/Motion In Limine

The court's analysis of the issues presented on the stipulated trial record, and raised by the government's pretrial motion in limine, begins with a discussion of the standard of review under 28 U.S.C. ยง1346(a)(1), which ...

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