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Cavoto v. Hayes

July 1, 2010

ROBERT F. CAVOTO, PLAINTIFF, COUNTER-DEFENDANT,
v.
MARY LOU HAYES, DEFENDANT, COUNTER-PLAINTIFF.



The opinion of the court was delivered by: David H. Coar United States District Judge

HONORABLE DAVID H. COAR

MEMORANDUM OPINION AND ORDER

Mary Lou Hayes filed a Form 1099-C information return with her 2006 federal income taxes, in which she reported her cancellation of an unpaid debt allegedly owed to her by her former son-in-law Robert F. Cavoto. Cavoto filed suit, claiming that Hayes's filing was fraudulent under § 7434 of the Internal Revenue Code. See 26 U.S.C. § 7434. Hayes counterclaimed, seeking repayment of the alleged debt, with interest. On December 14, 2009, this court conducted a bench trial at which Cavoto and Hayes both testified (as did Susan Cavoto, the plaintiff's ex-wife and the defendant's daughter). After examining the record and determining the credibility of the witnesses, the court now sets forth its findings of fact and conclusions of law as required by Fed. R. Civ. P. 52(a). The court finds for the defendant and counter-plaintiff Mary Lou Hayes on all claims and counterclaims.

FINDINGS OF FACT

1) The American Express Account

Robert Cavoto is Mary Lou Hayes's former son-in-law. Around 2000-2001, Cavoto and his (now ex-) wife Susan began to experience serious financial difficulties.*fn1 To help them through their hard times, Hayes first allowed Susan to have her own charge card issued on Hayes's American Express account; she later allowed Robert to have one as well. At least at first, the Cavotos were to pay for their own charges. Every month, Hayes would mail or, more typically, fax a copy of her monthly Amex statement to the Cavotos, who would pay Amex directly for the charges they had incurred. Susan used the Amex line of credit to pay for the family's household expenses (the Cavotos had five children), including food, gas, and sometimes clothing; and for some personal expenses. Robert used it primarily for business expenses but also for family and personal expenses. This arrangement appears to have worked smoothly until August 2002.

In August 2002, the Cavotos were unable to pay for the expenses they had incurred in June and July of that year. Without Susan's knowledge, Robert asked Hayes if she could cover those charges until he was able to repay her from income he expected his business to receive shortly. Hayes agreed to this arrangement, and from this point forward, she made several direct payments to Amex to cover charges incurred by the Cavotos. It was Robert, not Susan, with whom Hayes discussed the funds she was advancing on the Cavotos' behalf and arranged to be reimbursed. Hayes's payments continued until May 2003, around the time Robert and Susan separated (they later divorced in December 2004) and Robert's card was cancelled.

2) Reimbursement Agreement Between Hayes and Robert Cavoto

Hayes's payments to Amex on behalf of the Cavotos totaled $54,911.81. During 2002-03, Robert reimbursed Hayes $24,673.00, leaving a balance of $30,238.81 in unreimbursed charges. Hayes repeatedly attempted to collect these funds from Robert throughout 2003-04, to no avail. From January 2005 through late 2006, Hayes appeared to have given up attempting to collect any reimbursement from Robert, and she never attempted to collect any funds from Susan. On December 6, 2006, Hayes mailed Robert a demand letter for payment of the $30,238.81 balance. The letter included an itemized accounting of the couple's charges paid by Hayes and Robert's reimbursements to Hayes. (See Hayes Ex. 7.) He returned the letter to Hayes after scrawling "To: Mary Lou Hayes Go F**k Yourself" across the front of the envelope. (See Hayes Ex. 11.)

At trial, Hayes testified that Robert repeatedly promised to repay her for the Cavotos' charges on her Amex account. She further testified that they never drew any distinction between Robert's charges and Susan's charges, or between business, family, or personal charges; there were simply charges that the Cavoto family incurred and that Robert promised to repay. Robert, however, testified that (1) there was no express agreement to repay any charges, including those he "felt obligated" to repay because they were his own; (2) he only agreed to pay his own charges, which included his business charges and personal expenses, and his "reasonable" share of family expenses; (3) he "probably" told Hayes that he refused to pay for "Susan's" charges;

(4) Hayes "probably" said that she would gift the Cavotos in the amount of the unpaid charges. While Hayes proved a credible witness with a consistent account of events, the court did not believe Cavoto's hedged and conflicting testimony. Moreover, his own e-mails to Hayes further undermine his already dubious claims. For instance, on April 30, 2003, he told Hayes by e-mail that he had deposited $8,000 in her account and that he planned to deposit another $10,000 by May 10 of that year. "Hopefully," he wrote, "by the end of May you will be paid off entirely." (Hayes Ex. 5.) At a minimum, then, he did not believe that Hayes had agreed to gift him the remaining balance of his charges, at least not on or before the end of April 2003. So Hayes would have had to agree to gift him the balance once he and Susan had separated in April or May 2003-an unlikely story to say the least. On June 3, 2003, Cavoto informed Hayes by e-mail that he expected $23,000 in accounts payable to come in shortly and thanked her for her patience. (Hayes Ex.6.) But even the parties agree that Hayes never saw a penny of the $23,000 and that around this time, the only payment made by Cavoto to Hayes was $5,000 in May 2003. (Cavoto Ex.9; Hayes Exs. 7, 14.) Similarly, on April 24, 2003, Cavoto e-mailed Hayes to inform her that he expected $32,500 in accounts payable to come in shortly, and that "this money will be used to pay you back" and to hire a lawyer to press his claims for $40,000 in accounts payable still outstanding. (Hayes Ex. 4.)

In light of the in-court testimony, the evidence in the record, and especially the mismatch between the two in Cavoto's case, the court finds (1) that Hayes never told Robert that she would consider any unpaid Amex charges a gift; and (2) that Robert agreed to repay Hayes for the Cavotos' charges, without drawing any version of a distinction between "Robert's" and "Susan's" charges. Lastly, having reviewed the documents submitted into evidence-including the Amex statements and correspondence between the parties revealing payments made by Robert to Hayes-the court finds that the unpaid balance of the Cavotos' Amex charges paid by Hayes is in fact $30,238.51. (Cavoto Exs.7, 9, 12; Hayes Exs.1, 7, 14.)

3) Hayes's Form 1099-C Information Return

Hayes concluded in December 2006 that the remaining balance was an uncollectable debt. Her daughter Julie Cunningham is a certified public accountant who advised Hayes that in order to write off the remaining balance of the Cavotos' charges as a bad-debt deduction on her federal income tax return, she would have to issue a Form 1099-C information return to Cavoto. This she did; the return is dated December 8, 2006. (Cavoto Ex.2.) On her 2006 federal return, Hayes took a non-business bad-deduction-as a $3,000 short-term ...


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