United States District Court, D. Maryland
MYRON S. LEVIN, Plaintiff,
UNITED STATES OF AMERICA, Defendant.
Xinis United States District Judge.
in this federal income tax refund suit is Defendant United
States of America's (“United States”) Motion
to Dismiss Plaintiff Myron S. Levin's
(“Levin”) Complaint, or in the alternative, for
summary judgment against Levin. Also pending is Levin's
cross-Motion for Summary Judgment against the United States.
The issues are fully briefed, and the Court now rules
pursuant to Local Rule 105.6 because no hearing is necessary.
For the reasons stated below, the Defendant's motion to
dismiss is granted.
1994, Plaintiff Myron S. Levin (“Levin”) was a
limited partner in the Maryland limited partnership, PCC
Holdings Limited Partnership (“PCCH”). ECF No. 1
at 2. PCCH had only one other limited partner, Levin's
brother, Lawrence Levin.
itself was a limited partner of another partnership entitled
Presidential Corporate Center Associates, L.P.
(“Presidential”). ECF No. 1 at 2.
Presidential's only other partner was a company named
THREA Associates, LP (THREA). Presidential was in the
business of developing real property located in Prince
George's County, Maryland. ECF No. 23 at 1.
an economic downturn in the real estate market, Levin was
“no longer financially able to participate” in
PCCH. ECF No. 23 at 2. As a result, in May 1994, PCCH agreed
to exchange its entire interest in Presidential to THREA, and
THREA agreed to assume the entirety of PCCH's share of
Presidential's liabilities (the
“Transaction”). ECF No. 23 at 2. As part of the
abandonment of this partnership interest, Levin was
discharged from some unspecified “personal
guarantees.” ECF No. 25-6 at 4. THREA did not provide
PCCH or Levin any cash or other assets in exchange for this
transaction. ECF No. 23 at 2.
filed a joint federal income tax return for the tax year 1994
with the Internal Revenue Service (“IRS”). ECF
No. 23 at 2. In his tax return, Levin reported no tax
liability specifically attributable to “his exchange of
his partnership interest in PCC Holdings.” ECF No. 23
at 2. Levin reported a net operating loss of $5, 359, 579 on
his tax return. ECF No. 23 at 2. PCCH's return noted that
Levin made a “capital contribution” to the
partnership of $3, 330, 338. ECF No. 23 at 2. PCCH further
indicated on its tax return that Levin had a negative capital
account balance of $3, 330, 338 prior to the PCCH
transfer of its interest in Presidential to THREA. ECF No. 23
at 2-3. After the Transaction, Levin's capital account
balance in PCCH equaled zero. Id.
1998, the IRS conducted a partnership audit of PCCH pursuant
to the Tax Equity and Fiscal Responsibility Act of 1982, 26
U.S.C. §§ 6221 et
seq.(“TEFRA”). ECF No. 23 at 3. Levin's
brother served as the Tax Management Partner (TMP) of PCCH
for the audit. ECF No. 23 at 3; ECF No. 25-6 at 11. The IRS
and the TMP subsequently reached a settlement wherein the TMP
agreed that PCCH erred in treating the Transaction as a
cancellation of indebtedness rather than a capital gain
“equivalent to each partner's negative account
balance as of December 31, 1994.” ECF No. 23 at 3.
about January 20, 1998, the IRS issued a Form 886-A
Explanation of Items to the partnership which stated that
PCCH should have reported the sale of its partnership
interest in Presidential as a “gain, ” and not as
a “capital contribution” from both of its
partners on its 1994 partnership tax return. ECF No. 23 at 2;
see also Explanation of Items, ECF No. 23-4 at 2. On
August 25, 2000, the IRS assessed a $916, 065 federal income
tax against Levin as a result of the audit, reasoning that
Levin had realized a gain from PCCH's sale of its
interest to Presidential. ECF No. 23 at 4. The IRS did not
issue a Statutory Notice of Deficiency. Id.
2012 and 2014, Levin paid a total of $2, 585, 056.80 to the
United States for the tax debt he owed for the 1994 income
tax year. ECF No. 23 at 4. On March 21, 2014, Levin filed a
Form 1040X claim with the IRS in Kansas City, Missouri
seeking a refund of the federal income tax and interest he
paid for the tax year 1994. Id. On June 10, 2014,
the IRS confirmed the filing but disallowed Levin's
25, 2015, Levin filed the instant Complaint against the
United States asserting that the IRS's characterization
of the income from the 1994 transaction was erroneous. ECF
No. 1. Levin argues that the IRS should have characterized
the Transaction as “discharge-of-indebtedness income,
” instead of a capital gain. ECF No. 25-6 at 13. Had
the transaction been properly characterized, Levin now
argues, the IRS would be required to determine Levin's
solvency during the subject year on the partner-level because
the judicially created “insolvency exception”
allows an insolvent taxpayer to avoid recognizing a discharge
of debt as income. ECF No. 25-6 at 13. See, e.g.,
Babin v. C.I.R., 23 F.3d 1032, 1035 (6th Cir. 1994)
(citing Gershkowitz v. Commissioner, 88
T.C. 984, 1005, 1987 WL 49310 (1987)) (“Under the
insolvency exception, “a debtor will not recognize
income under section 61(a)(12) if he is insolvent following
the discharge of indebtedness.”). This process would,
in turn, require the issuance of an “affected items
statutory notice of deficiency.” ECF No. 25-6 at 13.
Because Levin was given no such notice, he contends that he
has jurisdiction to challenge the IRS determination. ECF No.
25-6 at 13. Levin seeks reimbursement of the federal income
tax he paid for the 1994 tax year in the amount of $2, 585,
056.00 and pre- and post-judgment statutory interests from
the initial date from which he first paid that amount. ECF
No. 1 at 5. Levin also seeks reimbursement for the costs of
bringing this action and any other relief the Court deems
appropriate. ECF No. 1 at 5.
February 10, 2017, the United States moved to dismiss the
Complaint under Rule 12(b)(1) for lack of subject matter
jurisdiction, or alternatively for summary judgment pursuant
to Rule 56. The United States argues that this Court lacks
subject matter jurisdiction under § 7422(h) to revisit
the characterization of income as to PCCH because it was a
partnership level determination and a product of the IRS'
settlement with the TMP. ECF No. 52 at 19.
response, Levin filed a cross-motion for summary judgment on
March 4, 2017. ECF No. 25. Levin acknowledges that his
brother, acting as TMP for PCCH, settled with the IRS, and
that settlement characterized the Transaction as capital
gain. ECF No. 23 at 3. Levin nonetheless argues that because
he did not participate in this audit, he is not bound by its
findings. ECF No. 23 at 3. Levin contends that his brother
“did not adequately communicate to [him] the
particulars of the case and reached a settlement of it in a
fashion that benefitted [Levin's brother] most.”
ECF No. 24-5 at 10. Neither Levin nor the United States has
produced a copy of the settlement agreement. See ECF
No. 24-1 at 13.