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Levin v. United States

United States District Court, D. Maryland

June 7, 2018

MYRON S. LEVIN, Plaintiff,


          Paula Xinis United States District Judge

         Pending in this federal income tax refund suit is Plaintiff Myron S. Levin's (“Levin”) Motion to Alter/Amend Judgment under Federal Rule of Civil Procedure 59(e). ECF No. 33. 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, Levin's motion is DENIED.

         I. Background

         In 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.

         PCCH 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.

         After 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.

         Levin 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.

         In 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 ¶¶ 19-21.

         On or 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 ¶¶ 16-21; see also Explanation of Items, ECF No. 234 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 ¶ 24. The IRS did not issue a Statutory Notice of Deficiency. Id.

         Between 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 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 claim. Id.

         On June 25, 2015, Levin filed this suit against the United States, asserting that the IRS's characterization of the income from the 1994 transaction was erroneous. ECF No. 1. Had the transaction been properly characterized, Levin argued, the IRS would have been required to issue an “affected items statutory notice of deficiency” and 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 4-5, 7, 13; see also ECF No. 25-1 at 7. Levin contends that because he was given no such notice, he could challenge the IRS determination, ECF No. 25-6 at 13. Levin consequently sought 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.

         On 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 argued that this Court lacked subject matter jurisdiction under 26 U.S.C. § 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.

         In response, Levin filed a cross-motion for summary judgment on March 4, 2017. ECF No. 25. Levin acknowledged 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 ¶ ¶19-21; see also ECF No. 30 at 5-8. Levin nonetheless asserted that because he did not participate in this audit, he is not bound by its findings, ECF No. 23 at 3; see also ECF No. 30 at 5-8. Levin also contended 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 produced a copy of the settlement agreement. See ECF No. 24-1 at 13.

         The Court issued its Memorandum Opinion and Order on September 13, 2017, granting the United States' motion to dismiss for lack of subject matter jurisdiction. See ECF Nos. 31 & 32. The Court found that as a matter of law, the disputed income was a partnership item, not an affected item as Levin argued, and the settlement agreement bound Levin to the treatment determined by the IRS in the partnership-level proceeding. See ECF No. 31 at 10-12; see also 26 U.S.C. ยง 7442(h). Levin then timely moved to alter ...

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