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Hamilton v. United States

United States District Court, N.D. Indiana, Fort Wayne Division

September 5, 2017




         Plaintiffs Robert and Joan Hamilton filed this action seeking a refund of federal income taxes. They argue that they are entitled to take large deductions for theft losses arising out of real estate investments they made in a development project that turned out to be fraudulent. They made part of those investments through a partnership that they jointly owned with another couple, and they made another investment directly, on their own behalf. Several years after the fraud came to light, the Hamiltons filed amended tax returns seeking a total theft-loss deduction of $464, 472 for the year 2008, when they first learned of the fraud, and they also sought to carry that deduction back to 2005. This would result in refunds of $21, 157 for 2008 and $76, 714 for 2005. The Internal Revenue Service disallowed those deductions and refused to issue the requested refunds, precipitating this case.

         The IRS has now moved for summary judgment, arguing that the Court lacks jurisdiction to the extent the Hamiltons seek deductions attributable to the partnership's losses, and that the remaining deductions could not have been properly taken in the years in question, so the Hamiltons are not entitled to any portion of the refunds they seek. The Hamiltons responded in opposition to that motion and also filed a cross-motion for partial summary judgment, arguing that they are entitled to the refunds attributable to the partnership. For the following reasons, the Court grants the IRS' motion and denies the Hamiltons' motion.


         In 2006, plaintiffs Robert and Joan Hamilton were approached with an investment opportunity in a real estate development project in North Carolina known as the Grandfather Vista Development. The investment was portrayed as the means by which the developers were financing the development. For $500, 000, investors could purchase a 10-acre lot within the development site from the developers. They would also simultaneously execute a buy-back agreement effective one year after the date of purchase, by which the developers would repurchase the lot at a price of $625, 000. The developers personally guaranteed the buy-back agreements, and apparently represented to buyers that they had over $100 million in net worth, meaning they portrayed the investment as nearly risk-free.[1] In addition, the buyers would not need to put substantial amounts of cash into the investment; instead, they would finance the investment through bank loans secured by the lots they were purchasing. The developers also agreed to pay the interest on those loans over the one-year period they would be outstanding. Thus, for a small down payment, the investors believed they would receive large, guaranteed returns after one year. As the Hamiltons explain it, they “understood that in exchange for using [their] credit to procure loans from pre-arranged banks, [they] would be repaid within a year with a significant return.” [DE 29 ¶ 3].

         The Hamiltons took part in the investment, and purchased one of the 10-acre lots for $500, 000. They made a $25, 000 down payment, and financed the rest through a bank, which disbursed the proceeds to the developers. At closing, the developers also paid the Hamiltons $38, 000 to pay for the first year's interest on the loan. The Hamiltons were unconcerned with which particular lot they received, as none of the 10-acre parcels could be developed on their own-their value was that they were part of the greater development project and that they came with buy-back agreements that promised significant returns. The lot the Hamiltons received was referred to as Lot 86.

         A short time after that transaction closed, the Hamiltons purchased a second, smaller parcel in the development. This lot was represented to be a retail lot that would be developed after the commercial development was completed. This time, the Hamiltons invested through a company named H-Cubed Enterprises, LLC. The two members of that company were RJH of Indiana, LLC, which the Hamiltons owned, and HomeHelper Enterprises, LLC, which was owned by their in-laws, Gregory and Cynthia Hellmann. H-Cubed Enterprises purchased this lot, known as Lot 135, for $275, 000. This entire amount was financed, so they did not pay anything at closing, but they signed notes personally guaranteeing the loan.

         As it turned out, those investments were indeed too good to be true. When it came time to close on the buy-back agreements, the developer failed to follow through. The developer never actually developed the property either, so the lots, which could not be developed individually, ended up being worth very little. Thus, the Hamiltons were left with large loans in their names, secured by property of little value. They state that they discovered the fraudulent nature of the project in 2008. In that same year, the state took action to shut down the Grandfather Vista development and another development in which some of the same developers were involved. Around that same time, the Hamiltons began joining lawsuits that sought recovery for these investments from various parties.[2] On December 16, 2008, they filed suit along with other purchasers of the 10-acre lots against numerous individuals and entities, including the developers and the banks that financed the loans. In 2009, they joined another lawsuit related to their purchase of Lot 135, and they also joined at least two other adversary proceedings in bankruptcy proceedings against some of the developers. Those various suits continued for several years. Ultimately, however, the Hamiltons filed bankruptcy, through which they discharged their loan obligations arising out of these investments. The lender as to Lot 86 released its security interest in that property, so the Hamiltons now own it outright, while the Hamiltons transferred their interest in Lot 135 to the Hellmanns.

         In 2011, the Hamiltons met with an accountant to address the tax implications of these investments and losses. They ended up filing amended tax returns for 2008, claiming that these losses constituted theft losses that could be deducted against their income in that year. For the amount of the deduction, they invoked a Revenue Procedure promulgated by the IRS applicable to losses from certain Ponzi schemes. They thus calculated their total investments into the properties (including the amounts that they borrowed but never had to pay back) and claimed 75% of those amounts as theft-loss deductions. That led to deductions in the amount of $361, 347 relative to Lot 86, plus another $103, 125 for their share of H-Cubed Enterprises' losses from Lot 135. Those partnership losses were different from what the Hamiltons and H-Cubed Enterprises had reported on their initial respective returns, and they filed amended returns to reflect those changes, but they did not file an administrative adjustment request relative to those changes, as discussed further below.

         Adding those deductions to the Hamiltons' return for 2008 would have reduced their tax liability for that year by $21, 157, so they sought a refund of that amount. They also sought to carry those deductions back to their 2005 returns, which would have reduced their tax liability for that year by another $76, 714, for which they also sought a refund. However, the IRS disallowed those deductions and denied their claim for refunds. Accordingly, the Hamiltons filed this action seeking those refunds.


         Summary judgment is proper when the movant shows that there “is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A “material” fact is one identified by the substantive law as affecting the outcome of the suit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A “genuine issue” exists with respect to any material fact when “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id. Where a factual record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial, and summary judgment should be granted. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing Bank of Ariz. v. Cities Servs. Co., 391 U.S. 253, 289 (1968)). In determining whether a genuine issue of material fact exists, this Court must construe all facts in the light most favorable to the non-moving party and draw all reasonable and justifiable inferences in that party's favor. Jackson v. Kotter, 541 F.3d 688, 697 (7th Cir. 2008); King v. Preferred Tech. Grp., 166 F.3d 887, 890 (7th Cir. 1999). Finally, the fact that the parties have each moved for summary judgment does not change the standard of review; cross-motions are treated separately under the standards applicable to each. McKinney v. Cadleway Props., Inc., 548 F.3d 496, 504 n.4 (7th Cir. 2008).


         The IRS moved for summary judgment in full. First, the IRS argues that the Court lacks subject matter jurisdiction over the Hamiltons' claims to the extent their deductions are based on H-Cubed Enterprises' losses, as they did not fulfill the procedural prerequisites to confer jurisdiction on district courts over refund suits for partnership items. As to the remainder of the Hamiltons' claims, which arise out of their investment in Lot 86, the IRS argues that, even assuming the Hamiltons are eligible to take theft-loss deductions for those investments, [3] 2008 could not have been the proper year to take those deductions. That would mean that those deductions could not have been carried back to 2005, either. The Hamiltons responded in opposition to that motion, and (even though the deadline to file dispositive motions had passed weeks earlier) also filed a cross-motion for partial summary judgment. In their cross-motion, the Hamiltons argue that the Court not only has jurisdiction as to the partnership deductions, they are entitled to refunds from those deductions as a matter of law because the IRS did not reject the partnership's amended return. The Court first addresses its jurisdiction over the partnership deductions, after which it addresses the remaining claims on their merits.

         A. ...

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