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Bilthouse v. United States

September 28, 2007


The opinion of the court was delivered by: Judge Virginia M. Kendall


Plaintiffs Alan Bilthouse ("Bilthouse") and Patricia Bilthouse (together with Bilthouse, "Plaintiffs") bring this action against the United States of America (the "Government" or "United States") in order to recover refunds for overpayment of income taxes for tax years 1994 through 1999. In 1993, Bilthouse purchased stock in S&E Contractors, Inc. ("S&E"), a Florida S corporation, for $500,000.00. Bilthouse contends that his S&E stock became worthless in 1997, resulting in a complete disposition of his interest in the stock under 26 U.S.C. § 165(g). Bilthouse attempted to take advantage of that purported complete disposition by filing amended tax returns in 2001 for tax years 1994 through 1999. Bilthouse argues that his tax basis in his S&E stock increased to $5,130,610.00 in 1997 when S&E realized cancellation of indebtedness income in that year in the amount of $20,627,575.00. Bilthouse contends that the increase in tax basis, coupled with the complete disposition of his interest in S&E that occurred when the stock became worthless, allowed him to amend his tax returns to deduct over $5,000,000.00 in accumulated disallowed passive losses allocated to him by S&E over a number of years. The Government argues that Plaintiffs' claimed deductions are not allowable because, Bilthouse's S&E stock became worthless in 1995, and not in 1997.

Now before this Court are Motions for Summary Judgment filed by Plaintiffs and by the Government. Because the Court finds that Plaintiffs have failed to meet their burden to establish that Bilthouse's S&E stock became worthless in 1997 and not at some point before 1997, Plaintiffs' Motion for Summary Judgment is denied. Because the Government has demonstrated that Bilthouse's S&E stock was worthless at least as early as 1995, the Government's Motion for Summary Judgment is granted.


In March of 1993, Bilthouse became a shareholder in S&E, a Florida S corporation, by purchasing a number of shares for $500,000.00. (Bilthouse 56.1 ¶¶ 3, 5, 6.) By 1997, Bilthouse's shares represented a 25% ownership interest in S&E. Id. at ¶ 7.

S&E was a heavy construction contractor in the business of performing municipal public works projects for the State of Florida and for its cities and counties. Id. at ¶8. In order to bid on such projects, S&E was required to obtain construction bonds. Id. at ¶ 9. From 1991 through 1997, S&E worked with two bonding companies -- Fireman's Fund ("Fireman's") and Safeco Insurance Company ("Safeco") -- to obtain such bonds.

S&E began operations in the early 1980's. (Bilthouse 56.1 ¶ 3; Govt.'s Response ¶ 3.) Despite having approximately $40 million in annual revenues by 1994, S&E reported positive income on its tax returns in only two years during the period 1992 through 1997. (Bilthouse 56.1 ¶ 4, Govt.'s Response ¶ 3; Govt.'s 56.1 ¶8; Bilthouse Response ¶ 8.) S&E reported positive income in 1994 in the amount of $145,111.00 and in 1997 in the amount of $1,612,765.00. (Govt.'s 56.1 ¶ 8; Bilthouse Response ¶ 8.) However, the positive income reported on S&E's tax returns in those years was dwarfed by the losses reported in 1992 ($2,221,130.00), 1993 ($1,046,923), 1995 ($18,377,151), and 1996 ($4,786,574). Id. The loss reported in 1995 corresponds, at least chronologically, to a fifteen month period, running from April 1994 to June 1995, during which S&E suffered millions of dollars in losses as a result of cost overruns on a large construction project for the City of Jacksonville (the "North Landfill Project"). Id. at ¶ 16.

S&E's former president and majority shareholder, Douglass Ebbers ("Ebbers") testified that S&E became financially insolvent in 1995. (Govt.'s Resp. to Add'l Facts ¶ 31; Govt. Exh. 46, p. 217:1-13; Govt. Exh. 45, p. 6:17-19.) Karen Price ("Price"), the accountant who prepared tax returns for S&E during the years at issue in this lawsuit, testified that she explained to Ebbers with respect to S&E's financial woes, that "being insolvent is basically the excess of liabilities over assets and the ability to pay." (Govt.'s 56.1 ¶ 22.) In 1995, S&E defaulted on its bonds and it became necessary for S&E to rely upon its bonding companies to finance the completion of its bonded contracts. (Bilthouse 56.1 ¶ 17.) In that same year, as a result of S&E's default, Fireman's and Safeco exercised their contractual rights to take control over the revenue from S&E's open projects, leaving S&E with a restricted cash flow. Id. at ¶ 20. In the fall of 1995, both bonding companies stopped issuing bonds to S&E for new public construction projects -- the business from which it derived its revenues. (Bilthouse 56.1(b)(3)(C) ¶ 10.) Moreover, Dean Akers ("Akers"), who was engaged by S&E as a consultant in the spring of 1995 and became its president later that year, testified -- via an affidavit submitted by the Government -- that at the time he became involved with S&E the decision had already been made not to bid on any more bonded work. (Govt. Exh. 47 ¶¶ 3-6.) However, Akers further testified -- via an affidavit submitted later by the Plaintiffs -- that S&E intended to stop seeking new government projects only temporarily, until it could obtain new bonding. (Pltfs.' Exh. D to Bilthouse Resp. ¶ 24.)

Also in the fall of 1995, S&E filed a lawsuit against the City of Jacksonville, Florida related to the North Landfill Project (the "NLP Suit"). (Bilthouse 56.1 ¶ 36.) Plaintiffs contend that the NLP Suit supported recovering approximately fifteen to twenty-seven million dollars in damages, which, they contend, would have been sufficient to repay the bonding companies and allow S&E to resume obtaining new bonding for new public construction projects. (Bilthouse 56.1(b)(3)(C) ¶¶ 3, 14.) However, the original contract amount on the North Landfill Project was approximately $12 million and S&E was approximately halfway through the job when it ceased work on the project. (Govt. Exh. 46, p. 263:15-22.) The NLP Suit was settled in 1997 with neither S&E, nor either bonding company, receiving any money from the settlement. (Bilthouse 56.1(a)(3) ¶ 8.) Plaintiffs contend that the settlement of the NLP Suit in 1997 was "extremely significant because the future of S&E hinged on receiving a significant recovery . . . because, without any settlement money, the two bonding companies could not be repaid for the costs they incurred to complete [S&E's] open projects." Id. at ¶¶ 39-40. It is undisputed that S&E was financially insolvent in 1997.


Summary judgment is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). This standard applies when cross motions for summary judgment are filed, as they have been in this case. Cont'l Cas. Co. v. Northwestern Nat'l Ins. Co., 427 F.3d 1038, 1041 (7th Cir. 2005). In determining whether a genuine issue of fact exists, the Court must view the evidence and draw all reasonable inferences in favor of the party opposing the motion. Bennington v. Caterpillar Inc., 275 F.3d 654, 658 (7th Cir. 2001); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). However, the Court is "not required to draw every conceivable inference from the record and mere speculation or conjecture will not defeat a summary judgment motion." Cont'l Cas. Co., 427 F.3d at 1041 (internal quotations and citations omitted). Moreover, the Court will "limit its analysis of the facts on summary judgment to evidence that is properly identified and supported in the parties' [Local Rule 56.1] statement." Bordelon v. Chicago Sch. Reform Bd. Of Trustees, 233 F.3d 524, 529 (7th Cir. 2000). Where a proposed statement of fact is supported by the record and not adequately rebutted, the Court will accept that statement as true for purposes of summary judgment. An adequate rebuttal requires a citation to specific support in the record, an unsubstantiated denial is not adequate. See Albiero v. City of Kankakee, 246 F.3d 927, 933 (7th Cir. 2001); Drake v. Minnesota Mining & Mfg. Co., 134 F.3d 878, 887 (7th Cir. 1998) ("Rule 56 demands something more specific than the bald assertion of the general truth of a particular matter[;] rather it requires affidavits that cite specific concrete facts establishing the existence of the truth of the matter asserted."). There is no genuine issue of material fact when no reasonable jury could find in favor of the nonmoving party. Brewer v. Bd. of Trs., 479 F.3d 908, 915 (7th Cir. 2007).


I. Burden of Proof

A plaintiff seeking a refund of taxes has the burden of proving that he is entitled to a refund. Lewis v. Reynolds, 284 U.S. 281, 283 (1932) ("The action to recover on a claim for refund is in the nature of an action for money had and received, and it is incumbent upon the claimant to show that the United States has money which belongs to him."). In addition to proving entitlement to a refund, the taxpayer also bears the burden of proof with respect to the amount of the claimed refund. United States v. Janis, 428 U.S. 433, 440 (1976) ("In a refund suit the taxpayer bears the burden of proving the amount he is entitled to recover. It is not enough for him to demonstrate that the assessment of the tax for which refund is sought was erroneous in some respects."). ...

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