Plaintiffs, I Civ. No. 11-875 (KSH) (PS)

V. IUNITED STATES OF AMERICA, I

Defendant. I OPINION

Katharine S. Hayden, U.S.D.J.

I. Introduction

This matter is before the Court on defendant United States ofAmerica’s motion for partial

summary judgment. [D.E. 14.]’ The case involves the 2001 sale ofreal property then owned by

plaintiffs Huai-Yin Yiu and Shu-Hua Cheng Yiu. In its motion, the United States is seeking an

order from the Court fixing the tax basis ofthe Livingston property at the original purchase price.

For the reasons that follow, the Court denies the United States’ motion.

II. Facts and Procedural history

On February 18, 1991, the Yius purchased a house in Livingston, New Jersey for

$2,530,000.00. (United States Stmt. Facts ¶ 1; Yiu Response ¶ 1.)

1 Despite the fact that the Yius include a section in their opposition papers titled “Statement of

material facts submitted in support of plaintiffs’ cross-motion for partial summary judgment,” the

Yius never: (a) submitted a formal cross-motion for partial summary judgment; (b) submitted a brief

in support of a cross-motion for partial summary judgment; or (c) requested reliefin the form of

partial summary judgment. (See Yiu Br. Opp. Mot. Summ. J. 6 (solely “request[ing] that

Defendant’s Motion be denied in its entirety.”); see also Section 2 ofthe Final Pretrial Order

(“FPTO”) {D.E. 22] listing the United States’ motion as the only pending or contemplated motion.)

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speaks for itself.”); Agreement of Sale, appended to Paula Yiu Cert., Exh. 13, Schedule C, appended

to Yiu Br. Opp. Mot. Sunim. J. (“Yiu Cert”).) A certification from the Yius’ daughter states that

after purchasing the house, the Yius also made improvements including but not limited to the

installation of: a front entrance gate with a security system; a chain link fence around the property’s

three-mile perimeter; and ajogging path through the woods. (Yiu Cert. ¶ 16; see also Carol

Schuler Harding Cert. ¶10 & Exh. 3, appended to Yiu Br. Opp. Mot. Summ. J. (“Harding Cert.”)

(attaching satellite photographs ofthe Livingston property purportedly “show[ing] the completed

pool, spa, and patio surround, the tennis court, the landscaping, including water fountain, themasonry walks around the house, and the front entrance gate.”).)

The Yius contend that these improvements cost them $208,073.00. (Yiu Cert. ¶ 16.) For

support, the Yius rely on an IRS worksheet titled “Adjusted Basis of Home Sold Worksheet”

prepared by their accountant Catherine T.L. Hwang, CPA which places the adjusted purchase price

ofthe house at $2,738,073. (See Adjusted Basis of Home Sold Worksheet, appended to Yiu Cert.,

Exh. 14 (“Adjusted Basis Worksheet”).) The Yius also rely on records obtained from LivingstonTownship: a tax assessment and worksheet placing the replacement value ofthe pool and tennis

court at $20,000 each, and building permits valuing two other unspecified April 1991 alterations at

$30,000 each. (Harding Cert. ¶9 & Exhs. 1 & 2.)

On April 11, 2001, the Yius sold the house for $2,900,000.00 and incurred fees and costs in

connection with the sale. (United States Stmt. Facts ¶3; Yiu Response. ¶ 3.) The Yius are foreign

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¶J 4—5; United States Response ¶114—5; United States Stmt. Facts ¶5; Yiu Response ¶ 5.)

Through counsel, the Yius contacted the IRS to fmd out why the full $290,000.00 was not

refunded. (Yiu Cert. ¶6 & Exh. 7; FPTO 6.) Their daughter’s certification states that a

representative ofthe IRS informed their attorney that only Mr. Yiu’s portion ofthe amount withheld

was returned because his taxpayer identification number was the one “on file” with the IRS. (Id)The IRS representative advised Mrs. Yiu to file a Form 1O4ONR-EZ under her taxpayer

identification number to recover the remaining $145,000.00. (Id.)

On September 24, 2008, Mrs. Yiu filed the recommended paperwork. However, in a letter

dated February 17, 2009, the IRS advised that it had disallowed the claim for the remaining amount

withheld because it deemed the claim to have been filed “more than 3 years after” the Yius had filed

their tax return. (Id. ¶8 & Exh. 8.)

On February 16, 2011, the Yius filed the within lawsuit {D.E. 1] ,seeking recovery ofthe

$145,000.00 that had been withheld, attorney’s fees and costs, and alleging that the United States’

imposition, collection, and retention ofthose funds were unlawful actions.

On January 25, 2012, the United States filed the present motion for partial summary

judgment, seeking an order from the Court fixing the tax basis ofthe Livingston house at

$2,530,000.00 at the time of sale. [D.E. 14.] The United States contends that because the Yius

2 26 U.S.C. § 1445(a) provides: “Except as otherwise provided in this section, in the case of anydisposition of a United States real property interest. . . by a foreign person, the transferee shall be

required to deduct and withhold a tax equal to 10 percent ofthe amount realized on the disposition.”

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$2,900,000, they did not receive a taxable gain on the property because the $370,000 difference

was offset by the cost of capital improvements to the property and the fees and costs associated

with the transfer ofthe property. (Yui Br. Opp. Mot. Summ. J. 1.)

III. Standard of Review

Federal Rule of Civil Procedure 56(a) provides that “[t]he court shall grant summary

judgment ifthe movant shows that there is no genuine dispute as to any material fact and the

movant is entitled to judgment as a matter oflaw.” Summary judgment is appropriate “where the

pleadings, depositions, answers to interrogatories, admissions, and affidavits show there is no

genuine issue of material fact and that the moving party is entitled to judgment as a matter of

law.” Azur v. Chase Bank, USA, Nat’! Ass’n, 601 F.3d 212, 216 (3d Cir. 2010) (quoting Nicini v.

Morra, 212 F.3d 798, 805—06 (3d Cir. 2000) (en banc) (citing Fed. R. Civ. P. 56(c))). To bematerial, a fact must have the potential to alter the outcome ofthe case. See Kaucher v. Cnly. of

Bucks, 455 F.3d 418, 423 (3d Cir. 2006). In determining whether summary judgment iswarranted “[t]he evidence ofthe nonmovant is to be believed, and all justifiable inferences are to

be drawn in his favor.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). At this stage,it is not the Court’s function “to weight the evidence and determine the truth ofthe matter but to

determine whether there is a genuine issue for trial.” Id. at 249.

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or other items, properly chargeable to capital account.” Id. § 1016(a)(1). In the present motion, the

parties dispute the tax basis ofthe Yius’ house at the time of sale. The United States contends that

no adjustment ever occurred and that the tax basis is the purchase price, while the Yius contend that

the tax basis is higher because ofthe improvements that they made on the house and the fees and

costs incurred in transferring the property. The distinction is meaningful because the gain or loss on

a sale ofproperty is calculated by the amount received from the sale minus the property’s tax basis.

Id. § 1001(a).

The Yius brought this case under 28 U.S.C. § 1346(a)(1), which grants jurisdiction to

district courts to hear taxpayer-initiated civil actions “for the recovery of any internal-revenue tax

alleged to have been erroneously or illegally assessed or collected.” When a taxpayer files a civil

action alleging that the IRS has erred in its determination, the burden ofproof is on the taxpayer to

establish, by a preponderance ofthe evidence, that the IRS ‘s assessment is erroneous. Francisco v.

UnitedStates, 267 F.3d 303, 319 (3d Cir. 2001).

Here, making all reasonable inferences in favor ofthe Yius and despite the lack ofspecific

documentation, the Court is satisfied that the Yius have adduced evidence to support their

contention that the Livingston property’s tax basis has increased beyond the purchase price. In the

record is the Yius’ accountant’s worksheet, the “Adjusted Basis Worksheet,” which, according to

the Yius’ attorney, was prepared in reliance upon contemporaneous documentation substantiating

the improvements made to the property. (See Adjusted Basis Worksheet; Harding Cert. ¶ 7). The

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replacement value ofthe pool and tennis court and the value oftwo other improvements. (See Yiu

Cert. ¶ 14 & Exh. 13; Harding Cert. ¶J 5,7-10 & Exhs. 1-3.)

Consequently, the United States is not entitled to partial summary judgment in its favor

setting the Yius’ tax basis in the property at the original purchase price ($2,530,000).

V. Conclusion

For the foregoing reasons, the United States’ motion for partial summary judgment [D.E.

14] is denied. An appropriate order will be entered.

Is! Katharine S. Hayden

Date: September 26, 2012 Katharine S. Hayden, U.S.D.J.

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