next case is malik versus united states of america the morning your honour's thank you for this opportunity to present oral arguments on what i think is a very complex case if first glance it does not appear to be that complicated but as we dove into the facts in the law it does seem to be a little more complicated than at first glance the nutshell is that norma heloc is trying to obtain a refund for tax that was paid on income which ultimately found its way to her that she had to pay back this was a claim of r case and it again she is trying to get a refund on tax that she paid for income that she's not kept the facts of this case were just very briefly she was married in one thousand nine hundred seventy eight counsel i think we've got the basic facts can i have direct you to the language of thirteen forty one a one and ask you the complicating factor here same's to me to be that they filed a joint return but who was the taxpayer insofar as the six hundred thousand dollars that was included that return with consumer well your honor that six hundred thousand dollars the joint return the the person who was allegedly taking too much income in the gross income of the taxpayer and you just said it wasn't the reason your honor this is different from some of the other cases norma heloc actually ended up paying a lot of her own money back to cover this income situation and i both aware of that and that may have been a loss in the future year but the fact that she settled with her husband doesn't make the six hundred thousand dollars at the time of the prior years return of gross income of hers does it how does how does something that wasn't gross income when the return was filed become gross income later well when that income your honor is used to purchase marital assets that both parties and up receiving i believe that this creates an exception if the court were to construe thirteen forty one that lack of a better word narrowly does so does labor as opposed to passive income as marital property and quote each spouse shall be considered to have contributed contributed equally to the production and acquisition of marital property and if it does say that then wouldn't we have to assume under ohio law that half of the money that mr blue so received from the staples company from  was was i guess ms malik's under that section and i'll be honest i didn't refer to that in any of the priests but that is a good point i think that that would be the situation but does that make the question is not whether once it's brought in she has a claim to half of it is that divorce settlement later apparently indicated  but whether that makes her the taxpayer with an unrestricted right to the i've just because under under ohio law she has a marital assets claim to it when it comes in does that mean that she owes the taxes on does it well if you were to look actually your honor because they filed a joint return she did zero taxes on everything or husband made i realize that she could've potentially filed for an innocent spouse doctrine but because she received a lot of marital assets and the separation agreement that was part of the record indicated there were a number of brokerage accounts in real estate that mr blue sows income used to purchase that was why mr blue's so insisted from the beginning that norm helic should reimburse him for half of the excess and come he was either found liable to his sister for or that was settled and that is exactly what happened refund because she was the spouse of someone that earned a lot of money she actually paid a lot of money and should be entitled to get a refund in my view   who paid the taxes on the drop return i believe the record would have shown that income was taken well yes there is nothing in the record your honor that would indicate that michael blue so wrote a separate checked or norma heloc did not pay anything this was taken i believe out of their income by their employer is in the record i believe that michael blues soul may have testified at deposition how he ended up getting w two forms but i don't think the mechanics were discussed in any detail if they were discussing this question and it has nothing to do with the legal issues in the case but for the life of me i do not understand why your client testified in her deposition that she felt compelled throughout this to do that compelled by her divorce attorney told her that she had no choice and mr blue so testified at his deposition that he insisted that she would have to pay him back fifty percent of this this she did not like it of course having it pay three hundred thousand dollars but her husband her ex husband michael blue so was very adamant that that if he had to pay a six hundred thousand for access income the norm a heloc who received a lot of assets that that income purchased should have some skin in the game so to speak and should have to pay that back didn't didn't mr blue so also testify at his deposition that if he hadn't been willing to pay it and he was ready to go to core and have litigation to have her pay it and didn't miss mallika also testify that that he had threatened litigation if he didn't enter into the separation agreement requirement that's correct your honor in welfare if his position was not totally frivolous i mean if as the divorce settlement agreement did that they owned all their assets jointly and six hundred thousand dollars came into the marriage which we know that it did on the tax paying here then then  they both got joint benefit from that and it increased the joint marital assets by that amount and then when the division came they should subtract that out the calls are after the division games i should subtract that out because it was no longer it should have gone into the don't marital assets to start with i mean whether that's the theory behind his position yes that was mr blue soz theory and he had very strong opinions on that is as was seen with his deposition testimony in norma heloc if the court recalled i believe mr blue so pa sister the six hundred thousand dollars in late two thousand and seven and early two thousand and eight it wasn't until two thousand and nine that norma heloc finally paid three hundred thousand dollars plus i think another twenty three thousand to cover some other legal fees or expenses but she fought that and the fact that it took her that long to pay indicates that she was very much resisting this again i know this case started at the administrative appeals level and it seemed that most of the focus at that point was whether this separation agreement was actually voluntary or whether that led to norma heloc having to forcibly pay back the money and again if if the court recalls that there was a lot of money received michael blues so testified in his deposition he was concerned of having to pay millions of dollars so a six hundred thousand dollars settlement for him and a three hundred thousand dollars reimbursement from nora was a pretty good thank you runners and may please the court nor on the heloc sri fund claim under thirteen forty one fails for four different reasons and this court need only reach the first to dispose of the other three because since the three hundred thousand payment was not deductible under the internal revenue code in the first instance she has no recourse to other relief under section thirteen forty one and the district court so held the nalla sis of where the payment could be traced to her gross income or whether her husband's income could somehow be imputed to her under ohio law is immaterial to the question of whether this three hundred thousand dollars is deductible under section one sixty five c two of the internal revenue code as a loss incurred in a transaction undertaken for profit and the district court correctly held that the divorce agreement was not and transaction entered into for profit she may have felt under some dress in the negotiating process but she was represented by counsel and her counsel negotiated this divorce agreement with counsel for her ex husband both of the parties agreed to it both of the parties signed it and both of the parties complied with it the no one is alleging that the agreement was breached in any way let me ask you something yes i'm with respect to one sixty two c one you did argue about that in your brief right we did but we note that the taxpayer did not raise that issue in the district court but you raised it i mean you raised it on appeal as the counter argument to it's a refutation of the one sixty five c to claim because i didn't refute it i mean you agreed that these were that mr blue so was engaged in a trade or business but i don't see if that's correct and so that being the case is real losses that were incurred in the trade or business they were not her losses your honor they were mr bruce's losses right the settlement of the litigation we don't have enough facts on this record to make that conclusion but he has a much stronger argument if he were here before a suing for his tax refund that he might be entitled to  the the only real question then goes back to one of the other factors i guess under thirteen forty one which is whether there's a nexus between her payment i guess and the initial entitlement right or the initial apparent entitlement right and we submit that the district court correctly found that that nexus was not shown on this record why doesn't that why doesn't a high a law  on how how it is that money is attributed for you know marital income is attributed and viewed how why doesn't that plan to i mean clearly both mr blue so and ms malik seem to be under the impression that the income that mr blue so received was equally mr may help ms metallics and mr blue sos they paid taxes on it that way mr blue so testified that she paid taxes on his tax liability and he paid taxes on her liability and they treated equally so why would it not why would there not be that nexus as as chief judge carnes noted there is a distinction here between income at the time of receipt and the imputation of property rights and marital assets upon dissolution of a marital estate and the marital property code that your honor cited with which i too was unfamiliar until you cited it but i think it's important to take it into the context that you read it each spouse is treated as contributing equally to what two in a state to something to be divided this is in the context of a divorce where you are coming from let's say a historical perspective where perhaps both spouses did not historically contribute equally to a body of assets but not a nominal or a lesser wage earning spouse would have contributed in kind would have perhaps not had as much wage income outside the home but have contributed in other fashions and so the law protected that spouse upon dissolution of the estate the lesser wage earner was not truth was not penalized for having contributed fewer funds to the marital estate upon it dissolution and there are plenty of policy reasons for that that don't implicate our case at the actual the facts here i mean yes he is the one who earned it right but they treated it as it was earned by both of them a lie a law attributed to being earned by both of them they paid taxes on it as though it had been earned by both of them we would we would take issue with that that characterization whether or not they commingled their funds is not material for to whom a night  of income on a return is attributed under federal law first point second point how they paid their taxes again whether they held their funds commingled in common accounts or who signed the check or who was responsible for the finances again does not speak to how income is traced under the federal tax law thirteen forty one if you go there requires that an income an item be included in gross income for a prior taxable year the item is what matters here not the eventual property rights and as your honor notes the divorce decree tracks this ohio law legal principle that says each one of you gets fifty percent of what you made together that's different from the tax law that says if an item of income was included in gross the person who was later asked to restore that income because that that payee should not have received it in the first instance is entitled to tax relief is a distinct principle completely from the disposition of marital assets and the fact that the ohio code speaks of income in terms of an asset should not be allied with the meaning of an item of income under the federal tax those are two distinct concepts let me let me ask you what counts is who had to restore it so you're saying that if she had entered into the settlement agreement with a sister of the husband that she would be entitled to this right your honor if she had been a party to the litigation and she has been accused or or it had been somehow determined that she had been excessively compensated that she had been the recipient of an item of income to which she had not in fact had an unrestricted right when she received it then when she restored it she would have a remedy under section thirteen forty one well she regardless of theri if they'd come to her and said we're going to so you because you ended up with the money regardless of who aren't it and he took it we're going to trace the money into your half of the marriage and going to sue you for it unless you settle with us and she had settled under your interpretation she had been paddled that one no your honor because the threat of litigation without more does not affect her rights to income earlier received the point is this she received income originally under a claim of right she received a paycheck and believed it was all to her if she actually had exposure on that i'm not talking about what you your honor has previously characterized as a frivolous claim against her as a negotiating tactic but if she for example in the in the in the earlier supreme court case lewis the gentleman there it received a bonus that had been miscalculated and he was obligated to return some of that if that had been the case for if she had been accidentally overpaid and was required to restore income that should not have been paid to her in the first instance that's different from being a party to litigation and having exposure there you can't bring someone in to a suit to call their right to income into question i understand i've used that phrase in before and it and it wasn't clear the first time so let me try again she earned income in the first instance and believed it was due to her if it later somehow became clear that that income was not due to her and she had to restore it to the pay or she would have a remedy under thirteen forty one a threat of litigation does not trigger that right under thirteen established that the taxpayer did not have an unrestricted right you can establish things through settlement agreements it was established at the moment of payment of income to her husband that she did not have an unrestricted right to it so you're saying that we guard lists of what happens after the husband is paid she can't qualify for thirteen forty one not with respect to an item of income initially paid to him that's correct  agrees this item in time was initially paid to him so so you're saying no matter what happens if she and he had been jointly sued under a conspiracy civil conspiracy theory are she a all that matters is who gets the enco yes your honor and because in the can am sorry i think that's the part i'm not understanding why does it matter who the paycheck goes to if they're both paying taxes on it they're treating it as income of the couple the state sees it as income of both of them equally they're paying they're paying the settlement back as though it's income on both of them together why why does why does it why is it the fact that all that matters is that the paycheck is issued to him because under federal property law you won't or under under federal tax law you owe tax on your income and not yours i guess i'm asking for you to point me to the provisions of the law that you're relying on i would i would go back to the ohio section that your honor cited and say that this does not generalize and i'm i'm speaking off the cuff here because i'm i'm not an authority on ohio state taxation but i suspect that section three zero five one seven one does not create a community asset out of income at the moment of receipt such that all spouses in ohio for example are presumed to have earned each other's income and items are not declared separately that work we're not talking about o understand but not my point is the reason i mention that is unrestricted right what defines a right what wall defines that right it's not i would submit federal income tax law nothing wrong with that i'm unprepared to speak to ohio law it has not been briefed it is not an issue that the taxpayer raised below or in her briefs and it is not an issue that we have responded to before this moment for you all relied on ohio law and some of your arguments i mean that's that's what made us look in the first place we did and we relied on ohio law looking at how whether it's a community property state or an equitable division state because in the case of a divorce you are dividing assets and assets can include income streams and i and thus you'll find in asset division statutes discussion of income but we would suggest that this provision and i i'm i'm afraid to make too broad a statement without adequate information here but my my strong suspicion is that the domestic code and the provisions of state law that deal with the disposition of assets are not controlling as to the original property rights of a recipient of income and i can't say more on that on the information in my pos so what you're saying is that understand i am asking this for clarification is that the right that counts is not the right after it's received but the right to receive it to begin with claim on the taxpayer who filed the original returns there reason i'm asking is to the extent that you have taxpayer quarrel in the drug return which it would say new is that of income your honor the statute is phrased in it at the statute doesn't contemplate multiple tax payers filing jointly or a consolidated corporate return it looks particularly at an item of income attributable to a particular tax the taxpayer in a drought return with respect to each item of income the person who earned it the parties are jointly liable but the federal law does not impute income of one taxpayer to another merely by virtue of the joint filing joint return can obligate both spouses but need not necessarily and we speak to that in in our brief as welland and taxpayers counsel acknowledged that there is availability to an innocent spouse under the federal tax law the person who for example files jointly with a spouse and it is later determined that the spouse who may have been the greater wage earner was committing some sort of misdeed the non liable spouse is able to obtain innocent spouse protection and is not excused from liability for the tax obligation on that return despite having file jointly the mess deed is not imputed to the innocent spouse any more than the income why shouldn't that be the same here shouldn't that be the same here it is that is the case for your honor no one is imputing the misdeed to miss the heloc smote him like entered into a settlement agreement on a claim then have an agreement between he and the wife that he would work that out with her he would then he would have been entitled of the entire six hundred thousand dollars right you don't have a strong claim in that grand did not it when it appears that way on this record your honor although we don't have his amended return and his his personal information is protected under sixty one of three we can't look we don't know but based on what he said it appears that he did claim a deduction for the settlement pain and there is authority in the circuit that says that a settlement payment like that is deductible but indemnification agreement of a third party is not and that's what the district court  it's had on here unless it's considered involuntary and we have said that it could be considered involuntary if if there would have been looting i mean it seems to me that our case law supports the idea that it could have been considered involuntary if there would have otherwise been litigation i was without disputing that point your honor i would question whether the defendant in that litigation had a punitive claim against her and now this is a defendant who previously has shared everything with her what claim could that be what excess compensation or what other claims of a torch tort claims by the company i positing that this ohio litigation is something in the nature of a shareholder derivative suit by of a member of the family operating this closely held corporation the sister the sister had claims against the relatives running the company she did not have claims against mr hillock paying the taxes here the there we know i mean i'm not familiar with the how all that sort of thing we know that she was not named to party and that doesn't mean they didn't have a claim against it means they didn't attempt to assert one it's unclear what role ms min helic played in the company i think the record reflects that she had a very limited professional role and that consisted primarily of event planning i don't believe that this record reveals that she was a major stakeholder or involved in the management of the corporation i don't believe she had any involvement in the determination of payroll or compensation as did the parties who were accused of wrongdoing with respect to compensation and did you have anything further no thank you thank you c i could i would just like to make a very simple statement about this substantial nexus yet it seems the i r s is looking at each of these separate circumstances as separate ones all of this liability that that norma helic potentially would have had but the money that she had to pay back this did not flow from a separation agreement in a divorce case by itself it was not isolated it was all part of that the original income earning which was excessive and i would just like to state that that it's indicated that the word circumstances plural is used by this court in some of the cases that establish that substantial nexus requirement uses circumstances plural and that's exactly what happened  it did happen over a number of years but again he had michael blues so not taken what his sister felt was excessive compensation norma helic never would have lost three hundred thousand dollars in assets stockbroker accounts or whatever that i don't have anything else if anyone has any questions i'd be glad to answer keefe do you have anything thank you thank you both thank you we'll be in recess