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Robb Evans & Associates, LLC v. United States

United States Court of Appeals, First Circuit

March 3, 2017

UNITED STATES OF AMERICA, Defendant, Appellee.

         APPEALS FROM THE UNIED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Michael A. Ponsor, U.S. District Judge] [Hon. Kenneth P. Neiman, U.S. Magistrate Judge]

          Paul A. Allulis, Attorney, Tax Division, United States Department of Justice, with whom Caroline D. Ciraolo, Principal Deputy Assistant Attorney General, Tax Division, United States Department of Justice, Teresa E. McLaughlin and Gilbert S. Rothenberg, Attorneys, Tax Division, and Carmen M. Ortiz, United States Attorney, were on brief, for the United States.

          David J. Vendler, with whom Morris Polich & Purdy LLP, Gregory S. Duncan, Stephen G. Hennessy, Joseph S. Tusa, and Tusa P.C. were on brief, for Robb Evans & Associates, LLC.

          Before Lynch, Circuit Judge, Souter, Associate Justice, [*] and Selya, Circuit Judge.

          SELYA, Circuit Judge.

         These appeals require us to construe and apply 26 U.S.C. § 1341(a), reproduced in the Appendix, a statutory provision that addresses the situation of a taxpayer who pays taxes on income that she must later restore because it is established in a subsequent year that she did not have an unrestricted right to the income. The statute permits such a taxpayer to reduce her tax liability for the year of repayment by the amount that her taxes in the year of inclusion would have decreased had the restored funds been excluded from her income in that year. But there is a catch: by its terms, section 1341(a) requires that the taxpayer must have had what appeared to be an unrestricted right to the income when she first reported it.

         Here, the controversy over the meaning and application of section 1341(a) arises in the course of a tax-refund suit brought by a court-appointed receiver. The court below, noting that Congress had enacted section 1341 in a spirit of fairness, fashioned a judicially created exception to the statute's "unrestricted right" requirement. Applying that judicially created exception, the court proceeded to deny the government's motion to dismiss and granted a modicum of relief.[1] Both sides appeal. After careful consideration of these appeals, we conclude that the district court erred: that Congress, in the spirit of fairness, tailored a statute to iron out a wrinkle in the Internal Revenue Code does not give a court license to make the application of the statute wrinkle-free. This conclusion leads us to apply the luminously clear language of the statute as written, sustain the government's appeal, reject the cross-appeal, reverse the judgment below, and remand for entry of judgment dismissing the tax-refund suit.

         I. BACKGROUND

         This tax-refund suit has its genesis in the efforts of Robb Evans & Associates, LLC, a court-appointed receiver (the Receiver), acting on behalf of a class of defrauded persons (the underlying plaintiffs), to collect judgments previously rendered against a network of interlocking corporations and their proprietors, John and Richard Puccio. The twists and turns of the Puccios' fraudulent scheme are by now well-documented. See, e.g., Zimmerman v. Epstein Becker & Green, P.C. (Zimmerman V), 657 F.3d 80 (1st Cir. 2011); Zimmerman v. Puccio (Zimmerman IV), 613 F.3d 60 (1st Cir. 2010); Zimmerman v. Cambridge Credit Counseling Corp. (Zimmerman II), 409 F.3d 473 (1st Cir. 2005). We assume the reader's familiarity with these opinions and with the district court's exegetic accounts of the facts undergirding the class action litigation. See Zimmerman v. Cambridge Credit Counseling Corp. (Zimmerman III) 529 F.Supp.2d 254, 256-64 (D. Mass. 2008); Zimmerman v. Cambridge Credit Counseling Corp. (Zimmerman I), 322 F.Supp.2d 95, 96-98 (D. Mass. 2004).[2] Consequently, we rehearse here only those skeletal facts needed to put these appeals into workable perspective.

         In 1996, the Puccio brothers formed Cambridge Credit Counseling Corporation (CCCC), a non-profit corporation organized under Massachusetts law. At around the same time, they formed parallel non-profit corporations in Florida and New York. These other corporations operated in much the same way as CCCC and, for simplicity's sake, we refer to the three non-profits, collectively, as CCCC.

         CCCC held itself out as skilled in improving credit ratings and trumpeted its ability to help financially strapped individuals by creating "debt management plans" for a fee. Under such a plan, an individual in straitened circumstances would make a single monthly payment to CCCC, and CCCC would (at least in theory) sprinkle payments around to the individual's creditors. As part of its service, CCCC aspired to "re-age" clients' debt, that is, to persuade creditors to mark clients' accounts as current in exchange for promises that CCCC would make regular payments. Business boomed: from 1996 to 2004, CCCC harvested over $250, 000, 000 from hopeful clients.

         The Puccio brothers likewise owned and controlled an array of for-profit businesses, some of which provided back-office support to the non-profit entities. The assets and operations of these businesses were inextricably intertwined with those of the non-profit entities: all of them shared management, staff, office space, clients, and funds. For example, CCCC freely transferred clients' accounts to its for-profit brethren without bothering to notify the affected clients.

         The balloon went up in 2003, when the underlying plaintiffs brought a class action against the Puccios and several of their corporations (both for-profit and non-profit). Roughly five years later, the district court granted summary judgment in favor of the underlying plaintiffs on their state-law consumer protection claims, Mass. Gen. Laws ch. 93A, and their claims under the federal Credit Repair Organizations Act (CROA), 15 U.S.C. § 1679 et seq. Judgment was entered against the corporations in the amount of $259, 085, 983 and against the Puccios in the amount of $256, 527, 000. The Puccios unsuccessfully appealed. See Zimmerman IV, 613 F.3d at 69, 76.

         Securing a judgment and realizing the fruits of that judgment are two different things. Thus, the district court appointed the Receiver and tasked it with collecting the judgments on behalf of the underlying plaintiffs. For the most part, though, the money had vanished into thin air: the Receiver was able to recoup less than $2, 500, 000.3 Endeavoring to boost this total, the Receiver filed a tax-refund claim for $9, 387, 235.[3] The essence of the Receiver's claim follows.

• The Receiver can assert a refund claim on behalf of certain taxpayers, namely, the Puccios and their for-profit corporations, which were judgment debtors.
• In earlier years, those taxpayers reported as income, and paid taxes on, monies that they euchred from the underlying plaintiffs.
• By virtue of the class-action judgment, the taxpayers are now obligated to restore those monies to the underlying plaintiffs (through the Receiver).
• The taxpayers may deduct those repayments, see 26 U.S.C. § 162, and may reduce their tax liability for the year of repayment by the amount that they overpaid in the years that they originally reported the income, see id. § 1341(a).
• Because the amounts of these deductions will exceed the taxpayers' tax liability for the year of repayment, refunds will be in order - and those refunds should be paid to the Receiver.

         In June of 2011, the Internal Revenue Service (IRS) denied the tax-refund claim. The Receiver responded by bringing this suit. See 28 U.S.C. § 1346(a)(1). The government moved to dismiss, arguing among other things that the Receiver (who stands in the taxpayers' shoes) was not entitled to the benefit of section 1341(a) because it never appeared to the taxpayers that they had an unrestricted right to the funds fraudulently obtained from the underlying plaintiffs. The district court denied the government's motion to dismiss. Although it agreed that the taxpayers never appeared to have an unrestricted right to the funds reported as income, it nonetheless concluded that, as a matter of equity, "the fraudulent conduct of the Puccios should not be imputed to [the Receiver]." Rob Evans & Assocs., LLC v. United States, 9 F.Supp.3d. 165, 169 (D. Mass. 2014). Accordingly, the court denied the government's motion to dismiss, holding that the government was obligated to honor the refund request. See id. at 171.

         The Receiver, though, did not achieve a total victory. The court limited the amount of the refund by holding that it must be based on the amount the receiver had actually collected and deposited into the Qualified Settlement Fund, not on the full amount of taxes paid by the taxpayers during the relevant years. See id. at 170-71; see also note 3, supra.

         After deciding the motion to dismiss, the district court stayed the case so that the Receiver could file administrative refund claims for additional tax years. The IRS denied those claims, and the Receiver, in its own words, filed its first amended complaint in order to "include [claims for] additional tax years." At that point, however, the Receiver gratuitously added two other sets of allegations in the first amended complaint: a constructive trust argument and a claim that section 1341(a) did not require actual restoration of the funds to the Qualified Settlement Fund as a condition precedent to deductibility. The government filed an answer and, since the district court's earlier adjudication of the motion to dismiss had effectively resolved the essence of the dispute, the parties jointly moved for the entry of final judgment, reserving their rights to appeal. The court granted the joint motion without substantive comment, relying on the reasoning laid out in its prior decision on the motion to dismiss. These timely appeals followed.

         II. ANALYSIS

         In this venue, the government's principal argument is that the district court erred in allowing the Receiver access to the balm of section 1341(a) because the taxpayers never appeared to have an unrestricted right to the reported income. In opposition, the Receiver starts by questioning our appellate jurisdiction. Past that point, the Receiver asserts that the taxpayers did have an apparent unrestricted right to the reported income and, in all events, that the district court did not err in fashioning an equitable exception to the statutory "unrestricted right" requirement. Finally, the Receiver submits that it is entitled to recoup all taxes paid to the government under a constructive trust theory. Before proceeding to more substantive matters, we briefly address the Receiver's jurisdictional challenge.

         A. Appellate Jurisdiction.

         The Receiver's jurisdictional challenge is premised on the contention that we lack jurisdiction because the government, despite reserving its right to appeal in the consent judgment, did not ...

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