* Honorable James E. Barrett, Senior Circuit Judge, w as unable to attend

oral argument. However, Judge Barrett participated fully in the decision of the case. 

## F I L E D United States Court of Appeals Tenth Circuit 

### AUG 8 1997 

### PATRICK FISHER Clerk PUBLISH
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

DOROTHY DYE, Plaintiff-Appellant, v. UNITED STATES OF AMERICA, Defendant-Appellee. No. 96-3055

Appeal from the United States District Court

for the District of Kansas (D.C. No. 95-2036-JWL)

Ervin G. Johnston, Johnston, Ballweg & Tuley, Overl and Park, KS, argued the cause for the appellant. Teresa E. McLaughlin, United States Department of J ustice, Washington DC, argued the cause for the appellee. Regina S. Moria rty assisted on the brief.

Before PORFILIO , BARRETT , * and EBEL , Circuit Judges.

EBEL , Circuit Judge.- 2 -

During the 1980s, Dorothy Dye lost over $850,000 be cause of various improprieties committed by her stockbroker. When D ye became aware of these improprieties, she sued. In 1989, the stockbroker’ s former employers settled Dye’s lawsuit for $572,905.97, of which $207,617.37 went to Dye’s attorneys. On her 1989 tax return, Dye sought to characterize the settlement proceeds as a “long-term capital gain,” and the attorneys’ fees a s a “capital expenditure.” Dye reduced her total tax liability for 1989 by applyin g the “capital expenditure” against the settlement proceeds. The IRS disallowed Dye’s “capital expenditure” redu ction, and demanded about $70,000 in additional 1989 tax, interest, and penalties. Dye paid the IRS the money it demanded, but timely sued for a refund under 28 U.S.C. § 1346(a)(1) (1994) and I.R.C. § 7422 (1994). The district court granted summary judgment in favo r of the IRS. Dye now appeals pursuant to 28 U.S.C. § 1291 (1994). Becau se the record adequately established that a substantial portion of Dye’s leg al expenditures were capital in nature, we conclude that it was error to have grant ed summary judgment to the IRS. Accordingly, we reverse and remand for furthe r proceedings.1 At that time, Rosenberger was employed by B.C. Chri stopher Securities

Company. During the 1980s, Rosenberger moved to an other brokerage firm, Blunt, Ellis & Loewi, then moved back to B.C. Chris topher Securities Company. Dye remained his client throughout the entire perio d. - 3 - BACKGROUND This is an appeal from a grant of summary judgment. Thus, the following facts are uncontroverted or are considered in the l ight most favorable to Dye, the
non-movant. See Kaul v. Stephan , 83 F.3d 1208, 1212 (10th Cir. 1996). All reasonable inferences from the factual record have been drawn in favor of Dye. In 1982, plaintiff-appellant Dorothy Dye delivered certain tax free municipal bonds and 1,058 shares of Phillips Petrol eum stock to her stockbroker William Rosenberger. 1 She instructed Rosenberger to hold the shares and bonds in an account for her benefit. In January 1983, Rosenberger moved Dye’s shares andbonds into a margin account. From 1983 to 1987, Rosenberger executed s ecurities transactions on this margin account that resulted in $383,423.63 in trad ing losses to Dye. These trading losses created a negative balance in the ma rgin account, forcing Dye to pay $170,991.71 in interest from 1985 to 1988. In addition, Dye lost $229,558 in interest on her tax-free municipal bonds between 19 82 and 1988, during which time all such interest was applied to support secur ities transactions executed on the margin account. Because of the “churning” in D ye’s account, Dye incurred2 In addition, every tax year from 1985 to 1989, Dye reported investment

interest expense on Schedule A of her federal incom e tax return, totaling almost the full $170,991.71 in interest she had paid.

3 In tax year 1984, Dye excluded from gross income on ly $1,743.95, as a “net short term capital loss.” In each tax year fr om 1985 to 1988, Dye excluded the statutory maximum of $3,000 per year as a “net long term capital loss.” - 4 - $14,856.79 in commissions and transfer fees. Final ly, Dye lost an additional $55,000 plus interest when Rosenberger borrowed that amount from Dye’s margin account and failed to repay it. Every tax year from 1984 to 1987, Dye reported capi tal losses on Schedule D of her federal income tax return, totaling her en tire $383,423.63 in trading loss. 2 However, because I.R.C. § 1211(b) allows capital losses in a given tax year to be set off against gross income only to the ext ent of that tax year’s realized capital gains, plus $3,000, Dye was able to set off against gross income a total of only $13,743.95 in capital losses on her 1984 throu gh 1988 federal income tax

returns. 3 As a result, at the end of 1988, Dye had a “net l ong-term capital loss carryover” of $369,680, as permitted by I.R.C. § 12 12(b). This figure was later “corrected” to $363,680. On July 1, 1988, Dye sued Rosenberger and his forme r employers under Section 10(b) of the Securities Exchange Act of 193 4, 15 U.S.C. §§ 78a et seq. , alleging securities fraud and mismanagement of her investment accounts. On February 22, 1989, Dye amended her complaint. The amended complaint alleged- 5 -

“churning [and] unsuitable and unauthorized trading ” in violation of Sections 10(b), 15(c)(1), and 20 of the Securities Exchange Act of 1934, and Rules 10b-5 and 15(c)(1)-(2) issued pursuant to that Act, as we ll as civil RICO violations under 18 U.S.C. §§ 1961-68, breach of fiduciary duty, negligence, common law fraud, and breach of contract regarding the unpaid $55,000 loan. In late 1989, both of Rosenberger’s former employer s settled with Dye. Under the settlements, Dye received $302,500 in cas h, forgiveness of her margin account debit balance of $270,405.97, and the relea se of some of her municipal bonds, which were being held as collateral on the m argin account. The settlement proceeds were not specifically allocated by the settlement agreements to any category of claimed damages. From the cash settlement proceeds, Dye's legal coun sel withheld $207,617.37 for attorneys’ fees and legal expenses. Thus, after paying her attorneys, Dye netted $365,288.60 ($94,882.63 in ca sh and $270,405.97 in margin account balance forgiveness), which was slightly le ss than the $383,423.63 in trading loss she had suffered and significantly les s than her total losses. In June 1990, Dye filed her 1989 federal income taxreturn, showing a total tax liability for 1989 of $5,198. On Schedule D of the tax return, Dye reported the $572,905.97 settlement proceeds from the Rosenb erger suit as a long-term4 Dye did not include the value of the release of herbonds as part of the

settlement proceeds. Neither party to the present litigation discusses the value of the bonds, nor indicates what portion of them were released. Apparently, both parties agree that the released bonds belonged to D ye throughout the entire period at issue, and that their release thus did not const itute income to Dye in 1989. - 6 - capital gain. 4 From this capital gain, Dye deducted a “net long- term capital loss carryover” from 1988 of $369,680, leaving a “net capital gain” of $203,225.97. Dye characterized the gain as a “legal settlement p ertaining to mis-handling of investments--prior years.” On Schedule A of her 1989 tax return, Dye reported the $207,617.37 in attorneys’ fees and expenses she incurred in the Ro senberger Suit as a miscellaneous itemized expense. Subsequently, howe ver, in August, 1990, Dye filed an amended 1989 return seeking to recharacter ize these attorneys fees and expenses as a capital expenditure, in order to offs et them against the settlement proceeds. On December 10, 1990, the Internal Revenue Service ("IRS") notified Dye that because she had failed to compute her “alternative minimum tax” under I.R.C. § 56, Dye had underpaid her 1989 taxes by $4 9,470.03. In response, on December 24, 1990, Dye filed a corrected 1989 tax r eturn. On this corrected return, Dye computed her alternative minimum tax, a nd also characterized the attorneys fees and expenses associated with the Ros enberger suit as a capital expenditure, as she had done on her amended return.5 Dye was assessed, and she payed, a total amount of $75,472.14 in income

tax, penalty, and interest for tax year 1989. The $54,442.63 that she paid on October 14, 1993 supplemented $21,0129.51 which she had already paid prior to that date. - 7 - On October 15, 1991, Dye filed a second amended 198 9 return that again characterized her attorneys’ fees and expenses as c apital expenditures. On April 9, 1992, the IRS disallowed Dye's two requests for a refund based on her amended 1989 return, on the grounds that the attorneys’ fee s and expenses associated with the “cost of recovery” of Dye’s money were ordinary expenses that were properly reported on Schedule A, rather than capital expense s appropriate for reporting on Schedule D. On February 18, 1993, Dye filed a thir d amended 1989 return, again seeking to recharacterize the attorneys fees and expenses as a capital expenditure. On October 14, 1993, Dye paid to the IRS her curre nt outstanding assessed 1989 federal income tax liability (including interest) o f $54,442.63. 5 On October 28, 1993, the IRS disallowed Dye's third claim for refu nd. On August 24, 1994, Dye filed a fourth amended return, again seeking to rec haracterize the attorneys’ fees and expenses as a capital expenditure, and claiming a refund of $69,989.74 based on her 1989 return. On October 11, 1994, the IRS d isallowed this fourth claim for refund. On January 20, 1995, Dye sued the IRS in federal di strict court, seeking a refund of $69,989.74 based on her 1989 federal inco me tax return, plus interest,- 8 -

attorneys' fees, and costs. The district court exe rcised jurisdiction pursuant to 28 U.S.C. § 1346(a)(1) (1994). In connection with Dye's lawsuit, the IRS reviewed its computation of Dye’s 1989 income tax, this time treating the settl ement proceeds as ordinary income rather than as a capital gain. Under this c omputation, the IRS increased Dye’s 1989 tax liability, including penalty and int erest, by $75,743.00 (i.e. from $75,472.14 to $151,215.14). The IRS concedes it is barred by the applicable statute of limitations from pursuing the additional $75,743.00 from Dye. However, it contends that this sum should be offsetagainst any refund Dye might otherwise receive as a result of the present litigation. In the district court, both Dye and the IRS moved f or summary judgment. On December 21, 1995, the court granted summary jud gment in favor of the IRS, and correspondingly denied Dye’s motion. Dye v. Un ited States , 77 A.F.T.R.2d (P-H) ¶ 96-901, 96-1 U.S. Tax Cas. (CCH) ¶ 50,130 ( D. Kan. 1995). Pursuant to 28 U.S.C. § 1291 (1994), Dye now appeals.

DISCUSSION We review a grant of summary judgment de novo . Applied Genetics Int’l, Inc. v. First Affiliated Sec. , 912 F.2d 1238, 1241 (10th Cir. 1990). We apply t he same standard under Fed. R. Civ. P. 56(c) used by t he district court: we determine whether any genuine issue of material fact was in d ispute, and, if not, whether the- 9 -

moving party was entitled to judgment as a matter o f law. Id. When considering a motion for summary judgment, we examine all evide nce in the light most favorable to the non-moving party. Jones v. Unisys Corp. , 54 F.3d 624, 628 (10th Cir. 1995).

I.
A. Whether litigation proceeds are properly characteri zed as “ordinary income” or “capital income” is governed by the “ori gin of the claim” test. Woodward v. Commissioner , 397 U.S. 572, 577 (1969); Dolese v. United State s , 605 F.2d 1146, 1150-51 (10th Cir. 1979), cert. deni ed , 445 U.S. 961 (1980). Under the “origin of the claim test,” a court seeki ng to classify litigation proceeds as either “ordinary” or “capital” income must focus on the "origin and character of the claim. . . .” Ransburg v. United States , 440 F.2d 1140, 1143 (10th Cir. 1971). In particular, litigation proceeds are deem ed “capital income” if “the origin of the claim litigated is in the process of acquisition itself,” Woodward , 397 U.S. at 577, or of disposition of property. Baylin v. United States , 43 F.3d 1451, 1454 (Fed. Cir. 1995). As the district courtnoted: the object of the "origin of the claim" test is to find the transaction or activity from which the taxable event proximately r esulted, United States v. Gilmore , 372 U.S. 39, 47 (1963), or the event that "led to the tax dispute." Keller St. Dev. Co. v. Commissio ner , 688 F.2d 675, 681 (9th Cir.1982). The origin is determined by an alyzing the facts- 10 -

and determining what the nature of the transaction is. Keller , 88 F.2d at 681. Dye , slip op. at 7-8. In the present case, the settlement agreements did not allocate the settlement proceeds by individual claim. Id. at 3. Thus, the “origin of the claim” test requires that a court determine how the settle ment should be allocated among the various claims actually settled, and the court must then determine whether the damages associated with each settled claim were stated in terms of loss in value to Dye’s capital assets. Applying the “origin of the claim” test in this way , the district court found that “[t]he amended complaint does not reflect liti gation involving the process of acquiring or disposing of assets, but rather a laws uit to compensate an investor for professional misconduct and to punish the alleg ed wrongdoers through the imposition of RICO treble damages or garden varietypunitive damages.” Id. at 9. Thus, the district court characterized the origin o f these claims as non-capital. Id. The court also found, however, that “Dye measured h er damages in part in terms of the loss in value of her securities account. . . .” id. at 8, and therefore could contend that “at least some of her expenses should be attributed to the process of acquisition of property, in the sense that . . . sh e was, in part, attempting to recoup securities wrongfully disposed of. . . .” I d. at 9.6 Although the particular bonds at issue here are tax -exempt municipal

bonds, see I.R.C. § 150(a)(6), that does not change the chara cter of the interest as ordinary income, as opposed to capital income. It merely means that there is an exemption whereby the particular ordinary income is exempt from tax.

7Normally, recovery of misappropriated principal wou ld not be “income” at all, either of the “ordinary” or the “capital” vari ety. Where, however, as may have happened here, the misappropriated principal w as already written off as a capital loss, it seems to us that the recovery woul d correspondingly be accounted for as a capital gain, although we leave this quest ion open for consideration on remand. - 11 - A reading of the amended complaint reveals that Dye was asserting claims for impairment to her capital, as well as claims wh ose origin relate to lost income or claims which the law otherwise treats as claims for ordinary income. In particular, claims that would generate ordinary inc ome include claims for: (1) lost interest on bonds; 6 (2) interest on the loans to Rosenberger; (3) lostdividends; (4) excessive margin interest charges; (5) punitive or treble damages; and (6) prejudgment interest. Claims that would generate c apital income include claims for: (1) diminution in value of Dye’s investments; (2) excessive commissions and transfer fees incurred in connection with securitie s transactions; and (3) recovery of the principal of the loan to Rosenberger. 7Indeed, the IRS in its brief concedes the capital nature of these latter three kinds of c laims.8 As a practical matter, Dye’s 1989 tax return would be subject to the

Alternative Minimum Tax, I.R.C. § 55-59, if her lit igation expenses were reported as miscellaneous itemized deductions, but not if th ey were reported as capital expense. See I.R.C. § 56(b)(1)(A)(i) (disallowing deduction formiscellaneous itemized deductions when computing alternative mini mum tax). The application of the Alternative Minimum Tax would significantly impact Dye’s 1989 tax liability. - 12 - B. On Schedule A of her 1989 tax return, Dye reported the $207,617.37 in attorneys’ fees and expenses she incurred in litigating the Rosenberger suit as a miscellaneous itemized (i.e. “ordinary”) expense. Subsequently, on her corrected 1989 tax return and each of her four amended 1989 t ax returns, Dye sought to recharacterize these fees and expenses as “capital” rather than “ordinary” expenses, and thereby to report them on Schedule D rather than Schedule A. The IRS disallowed this recharacterization, contending that all of these expenses were ordinary expenses. 8 Courts have long recognized, “as a general matter, that costs incurred in the acquisition or disposition of a capital asset are t o be treated as capital expenditures,” Woodward v. Commissioner , 397 U.S. 572, 575 (1970), as are “costs incurred in defending or perfecting taxpayer 's claim to ownership of capital assets. . . .” Spangler v. Commissioner , 323 F.2d 913, 919 (9th Cir. 1963). In a case involving securities appraisal litigation, the WoodwardCourt affirmed that

“ legal , brokerage, accounting, and similar costs incurred in the acquisition or- 13 -

disposition of . . . property are capital expenditu res.” Id. at 576 (emphasis added) (citing cases). It opined that “[t]he law c ould hardly be otherwise, for such ancillary expenses incurred in acquiring or di sposing of an asset are as much part of the cost of that asset as is the price paid for it.” Id. Capital expenditures are reported on Schedule D as “capital losses,” whi ch may be set off against “capital income,” also called “capital gains.” I.R .C. § 1211(b)(1). Dye claims that her attorneys’ fees and expenses are properly characterized as capital expenditures. To determine whether legal fees and expenses incurr ed in litigation are ordinary or capital in nature, once again the “orig in of the claim” test is applied. Woodward , 397 U.S. at 577; Dolese v. United States , 605 F.2d 1146, 1150-51 (10th Cir.1979), cert. denied , 445 U.S. 961 (1980); Ransburg v. United States , 440 F.2d 1140, 1143 (10th Cir. 1971); see generallyJean F. Rydstrom, Annotation, What Kinds of Legal Costs Incurred By T axpayer Are Deductible--
Current Cases , 39 A.L.R. Fed 221 (1978 & Supp. 1995) (surveying cases). Legal expenses incurred to recover claims for ordinary in come are ordinary expenses. Leonard v. Commissioner , 94 F.3d 523, 526 (9th Cir. 1996). Thus, for example, attorneys’ fees paid to recover interest are ordina ry expenses, id. , as are attorneys’9 In Spangler v. Commissioner , 323 F.2d 913, 919-20 (9th Cir. 1963), the

court held that attorneys’ fees paid to recover div idends were capital expenditures where “[t]he gist of the controversy between taxpay er and the managing officers in the state court litigation was the ownership of the stock.” The Spanglercourt’s focus on the “gist of the controversy,” and its cor responding decision not to allocate between capital and ordinary expenses, is consistent with the approach suggested by Dye in the present case. However, the Spanglercase was decided before the Supreme Court’s seminal decisions in Woo dward v. Commissioner , 397 U.S. 572 (1970) and United States v. Hilton Hot els Corp. , 397 U.S. 580 (1970), and, to the extent that it eschewed allocat ion, it has not been followed by any circuit court subsequent to those decisions. I n any event, to the extent that Spanglerconflicts with our decision in Dolese v. Commissio ner , 605 F.2d 1146, 1151 (10th Cir. 1979), cert. denied , 445 U.S. 961 (1980) (holding that where litigation involves more than one claim, “[t]he ori gin [of the claim] test must be applied separately to each part.”), we are bound by Dolese

. - 14 - fees paid to recover dividends, 9 Nickell v. Commissioner , 831 F.2d 1265, 1275 (6th Cir. 1987); see also id. at 1276 (Nelson, J., concurring in part and dissen ting in part) (agreeing with the majority that “all lega l expenses allocable to the recovery of dividends and interest” are ordinary expenses deductible under I.R.C. § 212), and attorneys’ fees paid to obtain punitive damages. McKeague v. United
States , 12 Cl. Ct. 671, 677 (1987), aff’d , 852 F.2d 1294 (Fed. Cir. 1988) (table). On the other hand, “[t]he cost of defending or perf ecting title to property” is a capital expenditure, Treas. Reg. § 1.263(a)-2( c), as is the expense incurred in recovering capital property. Nickell , 831 F.2d at 1275; Treas. Reg. § 1.212-1(k). As one court has explained: The policy behind [Treas. Reg. § 1.212-1(k)] is that expenses incurred in acquiring income-producing property--su ch as brokerage fees incurred in the process of acquiring stocks--a re part of the cost- 15 -

of the property, and are therefore treated as non-d eductible capital expenditures. These expenditures are added to the basis of the capital asset in connection with which they are inc urred, and are taken into account for tax purposes either through depreciation of the asset or through reduction of the capital gain (or augmentation of the loss) when the asset is sold. Burch v. United States , 698 F.2d 575, 577 (2d Cir. 1983) (citing Woodward , 397 U.S. at 575) (internal citations and quote marks om itted). Here, the district court purported to apply the “or igin of the claim” test to determine whether Dye’s $207,617.37 in legal expens es were “capital” or “ordinary.” In doing so, the court held that: The amended complaint does not reflect litigation i nvolving the process of acquiring or disposing of assets, but rather a lawsuit to compensate an investor for professional misconduct and to punish the alleged wrongdoers through the imposition of RICO treble damages or garden variety punitive damages. The expenses i ncurred in doing so are not capital in nature and are deductible, if at all, as ordinary business expenditures. Dye , slip op. at 9. In our view, the district court erred in treating t he legal expenses as a unified whole, rather than attempting to allocate t hem based on their respective “origins” in each of Dye’s legal claims. Where, as here, the litigation involves more than one claim, “[t]he origin [of the claim] t est must be applied separately to each part.” Dolese v. United States , 605 F.2d 1146, 1151 (10th Cir. 1979), cert. denied , 445 U.S. 961 (1980). Legal fees, like other exp enses, may, under certain circumstances, be partially deductible and partially nondeductible. See,- 16 -

e.g. , Treas. Reg. § 1.212-1(k) (“Attorneys’ fees paid i n a suit to quiet title to lands are not deductible; but if the suit is also t o collect accrued rents thereon, that portion of such fees is deductible which is pr operly allocable to the services rendered in collecting such rents.”); see also Boagni v. Commissioner , 59 T.C. 708, 713-14 (1973) (recognizing that legal expenses incurred can be characterized as both deductible and nondeductible when the litig ation is rooted in situations giving rise to both types of expenditures). Conseq uently, when litigation originates in claims that are both capital and ordi nary in nature, the litigation expenses should be allocated between the capital an d ordinary income claims. See
e.g. , Burch v. United States , 698 F.2d 575, 579-80 (2d Cir. 1983) (taxpayer's l egal expenses “should be apportioned between those devot ed to establishing [taxpayer’s] title to the trust property, which are non-deductible capital expenses, and those devoted to reducing [certain trustee] fee s, at least some of which appear to have been deductible expenses for the managementof income-producing property. Such an allocation between deductible and non-deductible expenses is not unusual, although a rough approximation is all that can be expected.”) (footnote, citations, and interior quote marks omitted); accordNickell v. Commissioner , 831 F.2d 1265, 1275-76 (6th Cir. 1987). As discussed supraSubpart A, Dye’s claims in the Rosenberger suit included more than just claims for recovery of ordi nary income. Dye also- 17 -

asserted claims for recovery of capital assets. Sp ecifically, Dye sought, inter alia , damages stemming from the $383,423.63 in securiti es trading losses she sustained, recovery of excess commissions in the am ount of $14,856.79, and recovery of excess transfer fees in an unspecified amount. In addition, she sought the return of the $55,000 in principal that Rosenbe rger had illegally borrowed, and the return of the pledged bonds being held as c ollateral on Dye’s margin account. These claims, which originated with the a cquisition or disposition of property, were capital in nature. See Subpart A, supra . The expenses incurred in prosecuting them were therefore capital expenses. See Woodward , 397 U.S. at 575; Hilton Hotels , 397 U.S. at 583. The district court thus erred i n holding all of Dye’s litigation expenses to be ordinary expenses. Dye . slip op. at 9. Like the settlement proceeds, the litigation expenses should have been allocated between “capital” and “ordinary” expenditures, pursuant to the “origin of the claim” test.

II. Having held that the “origin of the claim” test req uires allocation of both the settlement proceeds and the litigation expenses to their “origins” in each of Dye’s claims, we must now address the issue of how such an allocation might be made. As the district court noted, the settlement proceeds from the Rosenberger suit were not specifically allocated by the settlem ent agreements to any category- 18 -

of claimed damages. Dye , slip op. at 3. Further, the attorneys’ fees were computed on a straight contingency basis, and the attorneys’ costs and expenses were similarly undifferentiated. Id. Thus, like her settlement proceeds, Dye’s legal expenditures are not easily allocated accordi ng to Dye’s individual legal claims.
A. As a threshold matter, we note that on Dye’s 1989 t ax return, Dye reported the entire $572,905.97 in settlement proceeds as “l ong-term capital income,” and that, prior to the present litigation, the IRS neve r challenged this characterization of the proceeds. The IRS now believes, however, th at some portion of the settlement proceeds should have been characterized as “ordinary income” rather than “capital income.” The IRS concedes that it is time-barred under I.R.C. § 6501(a) from seeking any additional 1989 taxes thatturn on this distinction. Nonetheless, the IRS contends that such additional taxes should be offset against any refund Dye might receive as a result of the pre sent lawsuit. It has been long settled that “the ultimate questi on presented for decision, upon a claim for refund, is whether the taxpayer ha s overpaid his tax. This involves a redetermination of the entire tax liabil ity. While no new assessment can be made, after the bar of the statute [of limit ations] has fallen, the taxpayer, nevertheless, is not entitled to a refund unless he has overpaid his tax.” Lewis v.- 19 -

Reynolds , 284 U.S. 281, 283, modified , 284 U.S. 599 (1932) (quoting Lewis v. Reynolds , 48 F.2d 515, 516 (10th Cir. 1931)). Thus: While the statutes authorizing refunds do not speci fically empower the Commissioner to reaudit a return whenever repay ment is claimed, authority therefor is necessarily implied. An overpayment must appear before refund is authorized. Although the s tatute of limitations may have barred the assessment and coll ection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not e xceed the amount which might have been properly assessed and demanded. Id. ; see also Angle v. United States , 996 F.2d 252, 256 (10th Cir. 1993) (verifying that Lewis v. Reynolds is still good law). In sum, I.R.C. § 6501(a) precludes the IRS from hol ding Dye liable for any additional 1989 taxes, beyond the $75,472.14 Dye ha s already paid. To receive a 1989 tax refund, however, Dye must prove that $75,4 72.14 “exceed[s] the amount which mighthave been properly assessed and demanded.” Lewis , 284 U.S. at 283 (emphasis added). Thus, if any of Dye’s settlementproceeds should have been characterized as ordinary rather than capital incom e, then nothing in I.R.C. § 6501(a) precludes the IRS from setting off Dye’s ti me-barred but unpaid 1989 tax liability against any 1989 tax refund Dye might oth erwise obtain.- 20 - B. We must therefore proceed to discuss the allocati on of Dye’s settlement proceeds and expenses into categories of “ordinary” and “capital” income. In the present case, the problem of allocation was exacerb ated by the fact that, in their respective motions for summary judgment, neither Dy e nor the IRS conceded that Dye’s settlement proceeds and legal expenditures mi ght be partly ordinary and partly capital. Rather, Dye contended--and still c ontends--that all of her settlement proceeds and all of her expenditures wer e capital in nature. The IRS, by contrast, contended before the district court th at all of Dye’s settlement proceeds and all of her expenditures were ordinary, although it now concedes otherwise. Confronted with this stalemate, the district court held that it was Dye who shouldered the burden of allocating her settlement proceeds into capital and noncapital portions, and that Dye had failed to meet t his burden. Specifically, the court found that “no evidence has been presented by Ms. Dye . . . that would support any attribution of a portion of the expense s as capital in nature.” Noting that “Dye has the burden to prove she is entitled t o a tax refund,” Dye , slip op. at 10, the court granted summary judgment in favor of the IRS. Id. We believe that the district court overstated Dye’s evidentiary burden of production, and failed to account for the compellin g evidence before it that the10 When the suit is brought by the IRS to collect a de ficiency, the burden of

proof changes somewhat. In that context, if the ta xpayer proves that the IRS assessment is arbitrary and unsupportable, the burd en then shifts back to the IRS to prove what the correct amount of tax should be. United States v. Janis , 428 U.S. 433, 441-42 & n.8 (1976); Helvering v. Taylor , 293 U.S. 507, 515 (1935); see also Cebollero v. Commissioner , 967 F.2d 986, 990 (4th Cir. 1992) (surveying circuit court cases). However, as noted above, the procedural posture of the present case is a taxpayer suit for a refund, and n ot an IRS suit for deficiency. See generallyPortillo v. Commissioner , 932 F.2d 1128, 1133 (5th Cir. 1991) (“In a Tax court deficiency proceeding, . . . once the t axpayer has established that the assessment is arbitrary and erroneous, the burden s hifts to the government to prove the correct amount of any taxes owed. In a r efund suit, on the other hand, the taxpayer bears the burden of proving both the e xcessiveness of the assessment and the correct amount of any refund to which he is entitled.”) (citing cases). - 21 - IRS had acted arbitrarily in asserting that no port ion of Dye’s legal fees should be attributable to capital claims. We agree with the district court that in an action to recover taxes paid, the taxpayer has the burden to show not merely that the IRS’s assessment was erroneous, but also the amount of th e refund to which the taxpayer is entitled. 10 See United States v. Janis , 428 U.S. 433, 440 (1976) (“In a refund suit the taxpayer bears the burden of provin g the amount he is entitled to recover. It is not enough for him to demonstrate t hat the assessment of the tax for which refund is sought is erroneous in some respect s.”) (citing Lewis v. Reynolds , 284 U.S. 281 (1932)); accordHelvering v. Taylor , 293 U.S. 507, 514 (1935); cf. Interstate Transit Lines v. Commissioner , 319 U.S. 590, 593 (1943) (“[A]n income tax deduction is a matter of legislat ive grace and . . . the burden of clearly showing the right to the claimed deduction is on the taxpayer.”). As one- 22 -

court has explained, a taxpayer filing a tax refund case “bears the burdens both of production and of persuasion.” Ruth v. United Stat es , 823 F.2d 1091, 1093 (7th Cir. 1987) (citing Janis , 428 U.S. at 440). Thus, in order to prevail, Dye must prove not only the incorrectness of the IRS’s determination, but also the correct amount th at she is entitled to recover. The difficulty in the present case, however, is that Dye’s claims were denied at the summary judgment stage. Summary judgment is ap propriate where “there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c ). The burden of establishing the nonexistence of a “genuine issue” is on the party moving for summary judgment. 10A Charles A. Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice and Procedure § 2727, at 121 & n.1 (2d ed. 1983) (citing SMS Mfg . Co. v. U. S.-Mengel Plywoods, Inc. , 219 F.2d 606, 608 (10th Cir. 1955) and other cases). Although the burden of production may be s hifted to the non-moving party, see Celotex Corp. v. Catrett , 477 U.S. 317, 323-24 (1986), cert. denied after remand , 484 U.S. 1066 (1988), the ultimate burden of pers uading the court that there are no genuine issues of material fact a lways remains on the moving party. See id. at 323; accordid. at 330 (Brennan, J., dissenting). Thus, in the present context, Dye, the non-movant f or summary judgment, bears only the burden of production. On the issue of whether any genuine issues11 E.g., the $383,423.63 in trading losses, the $14,85 6.79 in excess

commissions, and recovery of the $55,000 principal on the unpaid loan.

12 E.g., the $229,558 in lost interest on the tax-free municipal bonds and the $170,991.71 in margin interest.

13 E.g., Dye’s claims for breach of fiduciary duty, ne gligence, and common law fraud, her civil RICO claims, her requests for punitive and treble damages, and her claim for excessive transfer fees. - 23 - of material fact remain disputed, however, it is th e IRS which bears the burden of persuasion. After the summary judgment stage, on t he ultimate issue of whether Dye is entitled to a tax refund, the burden of pers uasion reverts to Dye. Applying these principles to the present case, we n ote that the district court was faced with two motions for summary judgment, bo th of which were based on erroneous legal theories. See Part I, supra . In conjunction with these motions, Dye presented evidence that several of her claims a gainst Rosenberger were capital in origin. She also presented evidence pertaining to the value of these capital claims, 11 as well as the value of some of her non-capital cl aims. 12 On that record, the IRS’s motion, premised on the theory th at none of Dye’s settlement proceeds or litigation expenses were capital in nat ure, was arbitrary and insufficient to support summary judgment. It is true that Dye did not present evidence pertai ning to the value of allof her settled claims. 13 However, most of the claims which Dye did not spe cifically valuate merely stated alternative legal bases for awarding the same damages14 To the extent that the settlement covered, for example, Dye’s $383,423.63

trading losses, such recovery was “capital income” to Dye regardless of whether it was in settlement of her federal securities claim o r of her common law negligence claim. - 24 - specifically valuated in Dye’s principal claims. 14 As several courts have noted, the relevant inquiry “is not whether the action was one in tort or contract but rather the question to be asked is ‘In lieu of whatwere the damages awarded?’” Alexander v. IRS , 72 F.3d 938, 942 (1st Cir. 1995) (quoting Raytheo n Production Corp. v. Commissioner , 144 F.2d 110, 113 (1st Cir.), cert. denied , 323 U.S. 779 (1944)); accordGetty v. Commissioner , 913 F.2d 1486, 1490 (9th Cir. 1990). Simply stated, the relevant issue is not the name of the claim, but rather the origin of the claim. See Woodward , 397 U.S. at 577. Here, apparently Dye’s settlement was partly in lie u of her claims for $383,423.63 in trading losses, $14,856.79 in excess commissions, and $55,000 in unpaid principal. As the IRS now concedes, damages attributable to these claims are capital in origin. Dye’s settlement apparently was also partly in lieu of her $229,558 claim for lost interest on tax-free municipal bonds, which, even though tax free, is still considered ordinary income for p resent purposes--or at least it would not be considered capital income. Cf. Roemer v. Commissioner , 716 F.2d 693, 700 (9th Cir. 1983) (distinguishing between “o rdinary” tax-exempt income and “capital” tax -exempt income for purposes of al locating recovery expenses).15 To the extent, however, that Dye claimed punitive or treble damages, we

note both that her total settlement was for signifi cantly less money than her actual losses, and that the settling defendants admitted n o wrongdoing. At the summary judgment stage, these two facts support an inferenc e that Dye received no punitive or treble damages. On remand, the distric t court must determine whether any portion of the settlement should properly be al located to punitive or treble damages.

16 $383,423.63 in trading losses plus $14,856.79 in ex cess commissions plus $55,000 in unpaid principal. This figure does not include any damages attributable to excessive transfer fees, which woul d be capital in origin but which Dye did not valuate in her complaint in the Rosenbe rger suit. - 25 - Similarly, the settlement of Dye’s claim for $170,9 91.71 in margin interest would represent a claim for ordinary income, as would any settlement proceeds originating in any of Dye’s other claims. 15 Thus, in the Rosenberger suit, Dye claimed at least $853,973.74 in damages, of which $ 453,280.42 16 were capital in origin, and $229,558 were tax-exempt in origin. Co rrespondingly, only $170,991.71 of Dye’s claimed losses, plus any punit ive or treble damages Dye may have received, have their origin in the loss of Dye’s ordinary income. Under these circumstances, Dye has presented eviden ce adequate to overthrow the IRS’s assessment, and to establish th at there is a genuine issue of material fact as to what proportion of the settleme nt proceeds were ordinary income and what proportion were capital income. In deed, if all inferences are drawn in favor of Dye, the non-movant for summary j udgment, the aforementioned evidence is sufficient to permit calculation of the correct am ount of tax that is due, using at least one acceptable m ethod of calculation. See- 26 -

Delaney v. Commissioner , 99 F.3d 20, 25 (1st Cir. 1996) (approving Tax Cou rt's allocation of settlement proceeds based on percenta ge of damages represented by each element in jury award) (citing Robinson v. Com missioner , 70 F.3d 34, 38 (5th Cir.1995), cert. denied , 117 S. Ct. 83 (1996)); see generallyCommissioner v. Miller , 914 F.2d 586, 592 (4th Cir. 1990), aff’d after re mand , 60 F.3d 823 (4th Cir. 1995) (table) (discussing “a myriad of ways” i n which litigation proceeds which were not allocated by the parties might be al located by the tax court). Accordingly, we hold that the district court erred in granting summary judgment in favor of the IRS. The parties should h ave been allowed to proceed until the court was able to resolve the ambiguities in the record regarding the respective percentages of the settlement which were “capital” and “ordinary,” and to allocate the settlement proceeds based on its fi ndings.

C. The problem of how to allocate Dye’s attorneys’ fee s and legal expenses between capital expenditures and ordinary nonbusine ss profit making expenses is perhaps more difficult than the problem of how to allocate Dye’s settlement proceeds between ordinary and capital income. Whil e, as discussed supra , Dye’s settlement proceeds may be (roughly) allocated in p roportion to the categories of- 27 -

damages claimed by Dye, the relevance of the catego ries of damages claimed to the allocation of Dye’s legal expenditures is subje ct to debate. Notably, at least one appellate court has held that , under the “origin of the claim” test, the tax treatment of legal expenditure s should not necessarily be based on the relative amounts of capital and ordina ry income ultimately received. Baylin v. United States , 43 F.3d 1451, 1453 (Fed. Cir. 1995). Rather, und er the Baylincourt’s approach, legal expenditures should be all ocated according to the approximate proportion of the lawyers’ efforts attr ibutable to the pursuit of each claim. See id. at 1454. Thus, in Baylin, the court rejected as an “unsupported assumption” a taxpayer’s attribution of half of his legal fees to “collection of income,” despite the facts that: (1) half of the re covery was ordinary income; and (2) half of the legal fees were paid out of that re covery. Id. The Baylincourt predicated its rejection on the fact that “the evid ence presented on the attorney's allocation of his time suggests that he spent a de minimis amount attempting to increase the [ordinary income] portion of the award .” Id. Another appellate court, by contrast, has rejected an approach similar to that of the Baylincourt, “because it ignores the contingent fee port ion of the taxpayers’ contract with their lawyers, and allocat es fees only on the basis of the hourly rate portion of the contract.” Leonard v. C ommissioner , 94 F.3d 523, 526 (9th Cir. 1996). Under the Leonardcourt’s approach, “taxpayers are entitled to17 Indeed, in a straight contingent fee case, where lawyers are unlikely to

have maintained accurate hourly work-logs, the prop ortional recovery of each type of income might often be the onlyobjective criteria available to a court engaged in the difficult task of allocating legal e xpenses according to the “origin and character of the claim.” Cf. Burch v. United States , 698 F.2d 575, 580 (2d Cir. 1983) (“a rough approximation is all that can be expected”). - 28 - deduct what they actually paid their lawyers, accor ding to the contingent fee contract, to obtain their share of [each] portion o f the [litigation proceeds].” Id. In the case at bar, where Dye contracted with her attorneys solely on a contingent fee basis, the Leonardapproach would mandate that Dye’s litigation expen ses be allocated in proportion to the relative amounts of capital and ordinary income she ultimately received. 17 In the present context, we decline to choose a side in this debate. Rather, we note that under anymethod of allocation, it is clear that some of Dye ’s legal expenses originated in capital claims, as the IRS n ow concedes. Thus, we merely hold that Dye’s legal expenses should have been all ocated, in some rough or approximate way, between her “capital” and “ordinary” claims. Whether this allocation might best have been made according to t he proportion of Dye’s lawyers’ efforts dedicated to pursuing each category of claims (the Baylin approach), or simply according to the proportion of the settlement proceeds representing each category of claims, or any other reasonable way (the Leonard approach), is not before us now.- 29 - CONCLUSION We REVERSE the district court’s grant of summary ju dgment in favor of the IRS, and REMAND for further proceedings not inc onsistent with this opinion. Upon remand, the district court should allocate Dye ’s $207,617.37 in legal expenses between ordinary and capital expenses. Atthe IRS’s request, the court should also allocate Dye’s $572,905.97 in settlemen t proceeds between ordinary and capital income, for purposes of establishing a set off to any refund that may be awarded to Dye.