Court Opinion

ID: 4651657
Source: CourtListenerOpinion
Date Created: 2021-01-14 22:01:38.873321+00
Date Added: 2024-06-11T08:01:40.977428
License: Public Domain

In the United States Court of Federal Claims
                                               No. 18-871
                                         Filed: January 14, 2021
                                          FOR PUBLICATION

 TIMOTHY C. DEVINE,                                           Keywords: RCFC 12(b)(1), 26
                                                              U.S.C. § 6511(d), 26 U.S.C. §
                         Plaintiff,                           166, 26 C.F.R. § 1.166-1(c),
                                                              Tax Refund Claim, Business
 v.
                                                              Bad Debt Deduction, Net
 UNITED STATES,                                               Operating Loss, American
                                                              Recovery and Reinvestment
                         Defendant.                           Act of 2009

Michael James Maloney, Felicello Law P.C., New York, NY, for the plaintiff.

Miranda Bureau, Tax Division, U.S. Department of Justice, Washington, D.C., with whom was
David Pincus, Tax Division, U.S. Department of Justice, Washington, D.C., for the defendant.

                                      MEMORANDUM OPINION

HERTLING, Judge

        The plaintiff, Timothy C. Devine, is a former music industry senior executive who in
2003 began investing in real estate. In 2004, Mr. Devine partnered with a general contractor and
developer named Shauna Giliberti to purchase, rehabilitate, and rent or sell a Los Angeles
mansion located at 2450 Solar Drive (“Solar Drive” project). Mr. Devine funded the Solar Drive
project through monetary advances to Ms. Giliberti. Soon thereafter, Ms. Giliberti became
unable to repay Mr. Devine for his contributions to the Solar Drive project.

        This case concerns Mr. Devine’s efforts to seek a business-bad-debt deduction for his
asserted 2008 net operating loss (“NOL”) attributable to the advances he made to the Solar Drive
project and to elect to carry back his loss to tax years 2003-2007. Ordinarily, a taxpayer may
only carry back a NOL for a period of up to two years. A NOL may be offset against taxable
income for the two years preceding the occurrence of the NOL. Mr. Devine seeks to extend the
carryback period and the statute of limitations to claim a refund either through 26 U.S.C. §
6511(d) or through a provision of the American Recovery and Reinvestment Act of 2009
(“ARRA”), Pub. L. 111-5, 123 Stat. 115, enacted in response to the 2008 financial crisis.1

      1   References to Title 26 of the United States Code are cited hereafter as “I.R.C.”
        The defendant, the United States, acting through the Internal Revenue Service (“IRS”),
opposes the plaintiff’s attempt to carry back his NOL to 2003-2007. The IRS had previously
permitted a carryback to 2006 and 2007 and issued the plaintiff two refund checks. That two-
year carryback did not satisfy the plaintiff, who sued for refunds he alleges are due to him for tax
years 2003, 2004, and 2005. After the plaintiff filed this suit, the defendant altered its position
and now argues that Mr. Devine was not entitled to a business-bad-debt deduction at all. The
government has counterclaimed for the return of the two refund checks that it argues were issued
in error.

        Upon the completion of discovery, the defendant has moved both to dismiss and for
summary judgment on the plaintiff’s claim and to transfer its counterclaims to the Central
District of California.

I.     BACKGROUND

        The plaintiff was a successful music industry senior executive. (ECF 39, Pl. Resp. Ex. A,
A033.) He worked for Sony Music from 1995 until 2007. (Id.) From 2003 to 2005, he earned a
salary of approximately $1 million annually. (ECF 36, Def. Mot. Ex. 19, A366.)

       A.      Real-Estate Development

       In 2003, Mr. Devine decided to pursue a career in real-estate development after attending
seminars on the real-estate industry. (ECF 39, Pl. Resp. Ex. A, A058.) He planned to identify
and acquire properties for rehabilitation, intending to restore them and offer them for rent or sale.
Based on the advice of his accountant, Mr. Devine set up separate holding companies for each of
the properties he acquired. (Id. at A054.)

        Later that year, Mr. Devine acquired two properties in connection with his new real-
estate business: “Emerald Bay” in the Bahamas, and the “Breakers” in Playa Del Rey , California.
(ECF 39, Devine Decl. ¶¶ 5-6, A02.) He directly managed the renovation and rental of those
properties. (Id.)

       In March 2004, Mr. Devine met Ms. Giliberti, a licensed general contractor and the
principal of a real-estate-development company with knowledge of rehabilitation and
redevelopment of residential properties. (ECF 39, Pl. Resp. Ex. A, A034-35.) Ms. Giliberti
introduced Mr. Devine to the Solar Drive property, an 11,000-square-foot mansion located at
2450 Solar Drive in Los Angeles, situated on 22 acres in the Hollywood Hills with broad views
over downtown Los Angeles. (Id.) The mansion required extensive restoration work.

       Mr. Devine agreed to partner with Ms. Giliberti on the purchase and rehabilitation of the
Solar Drive property. On May 6, 2004, Mr. Devine and Ms. Giliberti closed on their purchase of
Solar Drive. The purchase price was $3.7 million. (ECF 36, Def. Mot. Ex 1.) Mr. Devine
purchased his 50 percent share of the property as part of a like-kind exchange under I.R.C.
§ 1031. (Id., Ex. 9, Ex. 27.) Mr. Devine advanced the funds necessary to purchase the property.
To acquire the property, he provided $4,050,464.30, $1,645,464.30 from his own funds and

                                                 2
$2,405,000.00 from the proceeds of a loan he obtained in his own name. 2 (ECF 39, Pl. Resp. Ex.
A, A079.)

       Mr. Devine created Solar Drive, LLC, of which he was the sole member through another
LLC, in conjunction with the Solar Drive project. (Id., Pl. Resp. Ex. A, A045-46.) Shortly after
closing, Mr. Devine transferred his 50 percent tenant-in-common interest in the property to Solar
Drive, LLC. (Id. at A062.)

        On or around the purchase date of the Solar Drive property, Mr. Devine and Ms. Giliberti
executed a Side Letter. It recited that each held an undivided 50 percent co-ownership interest in
Solar Drive as tenants in common. (Id., Pl. Resp. Ex. C.) It provided that the parties would
attempt to refinance the property as soon as possible after the closing, and that any proceeds
from the refinancing would first be applied to reimburse the co-owners for monies advanced to
improve and repair the property. (Id. ¶ 4.) The parties agreed to accept any bona fide offer for at
least $15 million to purchase the property. (Id. ¶ 5.)

        The Side Letter also specifically provided that:

               [i]n the event the Co-Owners execute promissory note(s) between
               the two of them and said promissory note(s) relate to the Property
               . . . . [a]ll Promissory Notes shall be paid in full upon the due date
               stated in the Promissory Note or the sale or refinance of the Property,
               whichever shall occur first. In the event of a sale or refinance of the
               Property, any unpaid Promissory Notes shall be paid directly from
               the escrow that receives the proceeds of the refinance or sale.

(Id. ¶ 6.)

       Mr. Devine and Ms. Giliberti also prepared a Co-Tenancy Agreement that was
incorporated into the Side Letter and provided:

               [a]ll benefits and obligations of the Property, including without
               limitation, income, revenue, operating expenses, debt, proceeds
               from sale or refinance or condemnation awards shall be shared by
               the Co-Owners in proportion to their respective ownership interest
               . . . . No Co-Owner may advance funds to another Co-Owner to
               meet expenses associated with that Co-Owner’s Ownership Interest,
               unless the advance is recourse to the Co-Owner and is for a period
               not to exceed 31 days. Such advances shall be evidenced by a
               Promissory Note containing a market rate of interest.

    2The total price of the acquisition exceeded $3.7 million due to various fees and taxes that
had to be paid at closing.

                                                 3
(Id., Pl. Resp. Ex. B ¶ 5.)

       Although the Co-Tenancy Agreement itself was never signed, the Side Letter, which was
signed, expressly incorporated the Co-Tenancy Agreement and provided that “[t]his agreement
and the Co-Tenancy Agreement between the parties dated May 6, 2004” are integrated
agreements that set forth the entire agreement between the parties. (Id., Pl. Resp. Ex. C ¶ 9.8.)

        Mr. Devine agreed to pay Ms. Giliberti $1,600 per week for general contractor services
for as long as Solar Drive needed improvements. (Id. ¶ 7.) These sums paid for renovations to
the master bedroom, kitchen, and other areas of the house. (Id., Pl. Resp. Ex. C, A070.) The
plaintiff’s apparent intent was for Ms. Giliberti to reimburse him for 50 percent of the sums he
advanced for improvements to Solar Drive “[b]ecause it was all going to benefit each of our
ownership stakes in the property.” (Id., Pl. Resp. Ex. A, A093.)

       B.      Purchase and Settlement Agreement and Subsequent Judgment

       Around 2005, Mr. Devine began demanding that Ms. Giliberti repay the money she owed
him. (ECF 39, Devine Decl. ¶ 16.) By 2006, Ms. Giliberti had pledged her 50 percent tenant-in-
common interest in the Solar Drive property to several different lenders. (ECF 39, Pl. Resp. Ex.
A, A117.) In April 2006, Ms. Giliberti filed for bankruptcy under Chapter 11; her bankruptcy
was later converted to Chapter 7. (Id., Pl. Resp. Ex. N, Ex. X.) In the bankruptcy proceeding,
Solar Drive, LLC filed a Proof of Claim evidencing the sums that Ms. Giliberti owed to Mr.
Devine; the liquidated portion of these sums totaled $1,467,339.32. (Id., Pl. Resp. Ex. N.)

        In August 2006, Solar Drive, LLC commenced an adversary proceeding against Ms.
Giliberti in bankruptcy court seeking a determination that the amount she owed to Solar Drive,
LLC was non-dischargeable pursuant to 11 U.S.C. § 523. (Id., Pl. Resp. Ex. O, A325 ¶ E.)

       In 2007, Ms. Giliberti’s 50 percent tenant-in-common interest in Solar Drive was
foreclosed upon by the beneficiary of one or more deeds of trust she had granted. (Id. ¶ G.)

        In early 2008, Ms. Giliberti was contacted by another lender willing to finance a buy-out
of Mr. Devine’s 50 percent interest in Solar Drive and to pay off the sums she owed. Mr. Devine
and Ms. Giliberti commenced negotiations regarding a purchase price and satisfaction of the
amounts she owed him. (Id.) While the co-tenants were negotiating the details of the sale, the
global financial crisis hit.

        In November 2008, Mr. Devine, Solar Drive, LLC, and Ms. Giliberti entered into a
Purchase and Settlement Agreement (“2008 Agreement”) concerning Solar Drive. The 2008
Agreement provided that “Devine provided the initial down payment for the purchase of the
Property, fifty percent (50%) of which was deemed to be a loan to Giliberti.” (Id. ¶ B.) Mr.
Devine expended “more than $900,000 for the cost of such improvements” to Solar Drive, 50
percent of which “were by agreement of the parties considered to be a loan to Giliberti,” and
“fifty percent of all moneys paid by Solar Drive to support the Property, including but not
limited to mortgage payments, property taxes and insurance, were by agreement of the parties
considered to be a loan to Giliberti.” (Id.)

                                                4
         The 2008 Agreement stipulated that Ms. Giliberti would pay $4,500,000 to Solar Drive,
LLC: $2,000,000 for the sale of Solar Drive, LLC’s interest in the Property and $2,500,000 in
full settlement of the claims in the adversary proceeding in bankruptcy court. (Id. ¶ 1.)
Handwritten notations on the document reflect that the total payment amount was later changed
to $4,400,000, reflecting a reduction of the amount to be paid in settlement of the adversary
proceeding to $2,400,000. (Id. ¶ 1(d).)

        Of the $2,400,000 Ms. Giliberti agreed to pay in settlement of the adversary proceeding,
the 2008 Agreement provided she would pay $1 million upon the closing of escrow. (Id. ¶ 1(a).)
The remaining $1.4 million would be paid out in three separate tranches of $500,000, $500,000,
and $400,000, under a payment schedule terminating 24 months after the close of escrow. (Id. ¶
1(a)-(e).) The 2008 Agreement provided that the “indebtedness of [$1,400,000] to be paid as set
forth in the previous subparagraphs (b), (c) and (d) shall accrue simple interest at the rate of
7.5% per year.” (Id. ¶ 1(e).)

        If Ms. Giliberti failed to close escrow by February 27, 2009, Solar Drive, LLC would be
entitled to a non-dischargeable judgment against her in the principal amount of $2,500,000, with
interest accruing from the date a court entered judgment against her. (Id. ¶ 9.) On January 29,
2009, the bankruptcy court entered an order approving the Purchase and Settlement Agreement
the parties executed. (ECF 36, Def. Mot. Ex. 7, A192.)

       Because of the 2008 financial downturn, the source of financing that Ms. Giliberti had
secured in early 2008 was no longer viable, and, as a result, there was no possibility that she
could obtain the financing to effectuate the purchase contemplated by the 2008 Agreement or to
pay the sums she owed to Mr. Devine. (ECF 39, Pl. Resp. Ex. U.)

        On May 20, 2009, the United States Bankruptcy Court for the Central District of
California entered judgment in favor of Mr. Devine and Solar Drive, LLC and against Ms.
Giliberti in the amount of $2,500,000. (ECF 36, Def. Mot. Ex. 7, A192.) Mr. Devine filed a
notice of renewal of that judgment in May 2019. (Id. at A182.)

       C.     Amended 2008 Return and Refund Claim

       In 2014, Mr. Devine filed tax returns for tax years 2008 through 2013 for the first time.
On April 8, 2016, he filed an amended 2008 return on Form 1040X claiming a business-bad-debt
deduction for tax year 2008. He also filed amended returns on Form 1040X for tax years 2003,
2004, 2005, 2006, and 2007, and a Form 1045 Tentative Claim for Refund. (ECF 39, Pl Resp.
Ex. D.) His 2008 Form 1045 sought to carry back a NOL of $2,925,326.00 for the five
preceding years. (ECF 36, Def. Mot. Ex. 3, A014-20.) He premised his claim on a provision of
ARRA which provided a five-year carryback for a NOL incurred in 2008.

       Mr. Devine sought the following refunds:

                   Tax Year                Taxes Paid            Refund Sought

                     2003                  $249,920                $230,119

                                               5
                      2004                    305,216                 280,010

                      2005                    246,692                 211,701

                      2006                    244,565                 167,063

                      2007                    94,272                   20,726

(ECF 1, Compl. ¶¶ 21-25, 39.)

        In May 2016, the IRS notified the plaintiff that his claim to elect the five-year carryback
period under ARRA was untimely because it “had to be filed on or before Oct. 15, 2009.” (ECF
39, Pl. Resp. Ex. E, A289.) The IRS did not dispute that the plaintiff might be entitled to a
business-bad-debt deduction under I.R.C. § 166. (Id.) The IRS requested that he submit further
information and adjust the claim to seek a refund only for tax years 2006 and 2007, using the
standard two-year carryback. (Id.) The IRS correspondence acknowledged that the carryback
claims for tax year 2008 had been timely.

       In correspondence in January 2017, the IRS Appeals Office disallowed Mr. Devine’s
claim for a refund for tax years 2003, 2004, and 2005, but granted his appeal with respect to tax
years 2006 and 2007 and accepted his refund claim. (Id., Pl. Resp. Ex. H.) In February 2017,
the IRS issued the plaintiff a check for tax year 2006 in the amount of $255,237.21, reflecting a
refund of $232,312.00 in tax and overpayment interest of $22,925.21. (Id., Pl. Resp. Ex. L.) The
IRS also issued the plaintiff a check for tax year 2007 in the amount of $27,593.41, reflecting a
refund of $25,115.00 in tax and overpayment interest of $2,478.41. (ECF 15, Def. Ans. ¶¶ 8, 19.)

       D.      Procedural History

       On June 19, 2018, the plaintiff filed suit in this court seeking a refund for tax years 2003,
2004, and 2005 based on a 2008 NOL and a five-year carryback as provided by ARRA. On
September 26, 2018, the defendant filed its answer and two counterclaims seeking the return of
allegedly erroneous refunds the IRS had issued to the plaintiff for tax years 2006 and 2007. The
defendant now moves to dismiss under Rule 12(b)(1) of the Rules of the Court of Federal Claims
(“RCFC”), claiming the plaintiff’s suit is untimely. The defendant also moves for summary
judgment on the plaintiff’s claims under RCFC 56. In the event the Court grants the motion to
dismiss the defendant also moves for a transfer of its counterclaims to the Central District of
California. The matter has been fully briefed, and the Court held oral argument on December 10,
2020. The Court offered the parties the opportunity to submit supplemental briefs after the
argument, but neither party did so.

II.    JURISDICTION AND STANDARD OF REVIEW

        The defendant argues that this Court should dismiss the plaintiff’s refund claims for lack
of subject matter jurisdiction under RCFC 12(b)(1) due to untimeliness. Because subject matter
jurisdiction is a “threshold matter” that must be addressed before reaching the merits of the

                                                 6
plaintiff’s claims, Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94-95 (1998), the Court
proceeds by first determining whether it may exercise jurisdiction over the plaintiff’s claims.

       A.      Standard of Review: Dismissal Under RCFC 12(b)(1)

       Jurisdiction is “power to declare the law.” Id., citing Ex parte McCardle, 7 Wall. 506,
514 (1868). The Court “is bound to ask and answer for itself [the jurisdiction question], even
when not otherwise suggested, and without respect to the relation of the parties to it.” Id.

        To determine jurisdiction, the “court must accept as true all undisputed facts asserted in
the plaintiff’s complaint and draw all reasonable inferences in favor of the plaintiff.” Trusted
Integration, Inc. v. United States, 659 F.3d 1159, 1163 (Fed. Cir. 2011). The plaintiff bears the
burden of establishing subject matter jurisdiction by a preponderance of the evidence. Id. If the
plaintiff cannot meet this burden, the court must dismiss the action for lack of jurisdiction.
RCFC 12(h)(3).

         “When subject matter jurisdiction is questioned, the court . . . may resolve factual
disputes.” Prakash v. American University, 727 F.2d 1174, 1180 (D.C. Cir. 1984). “Fact-
finding is proper when considering a motion to dismiss where the jurisdictional facts in the
complaint . . . are challenged.” Moyer v. United States, 190 F.3d 1314, 1318 (Fed. Cir. 1999);
see also Reynolds v. Army and Air Force Exch. Serv., 846 F.2d 746, 747 (Fed. Cir. 1988) (noting
that if a motion “challenges the truth of the jurisdictional facts alleged in the complaint, the
[trial] court may consider relevant evidence in order to resolve the factual dispute”). The court
may consider evidence outside of the pleadings in order to determine its jurisdiction , including
declarations, affidavits, evidentiary hearings, or otherwise. Rocovich v. United States, 933 F.2d
991, 994 (Fed. Cir. 1991); Rogers v. United States, 95 Fed. Cl. 513, 514 (2010).

       B.      Jurisdiction

        This Court has jurisdiction over claims “for the recovery of any internal revenue tax
alleged to have been erroneously or illegally assessed or collected . . . or of any sum alleged to
have been excessive or in any manner wrongfully collected” only when “a claim for refund or
credit has been duly filed with the Secretary” according to applicable laws and regulations.
I.R.C. § 7422(a).

               1.      Refund Claims Under I.R.C. § 6511(a)

         A claim for refund of a tax payment must be filed “within the time limits imposed by
[I.R.C.] § 6511(a).” United States v. Dalm, 494 U.S. 596, 602 (1990). Section 6511 provides
that a taxpayer must file a claim for refund with the IRS “within 3 years from the time the return
was filed or 2 years from the time the tax was paid, whichever of such periods expires the later,
or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.” I.R.C.
§ 6511(a).

        Mr. Devine did not file a refund claim within the time limit imposed by § 6511(a). He
filed his refund claim in April 2016, more than three years from filing his tax returns for tax year
2003 (filed in 2004), 2004 (filed in 2006), and 2005 (filed in 2007). His refund claim was also
                                                 7
filed more than two years from the time the tax was paid. His claim is therefore not timely under
I.R.C. § 6511(a).

               2.      Refund Claims Under the American Recovery and Reinvestment Act

        ARRA provided eligible small businesses with the option to carry back 2008 NOLs for
up to five years, rather than the standard two-year carryback of I.R.C. § 6511(a), so long as the
taxpayer filed a timely claim. See ARRA, § 1211. Shortly after the statute’s enactment, the IRS
issued Revenue Procedure 2009-26 interpreting that provision of ARRA. Revenue Procedure
2009-26, 2009-19 I.R.B. 935 (May 11, 2009). Under this Revenue Procedure, taxpayers seeking
to elect a 2008 NOL carryback were required to file the appropriate tax return applying the NOL
by October 15, 2009.

       It is undisputed that the plaintiff did not make his carryback election by October 15,
2009, the extended deadline for filing a return for tax year 2008. Though the plaintiff challenges
the promulgation of the IRS’s Revenue Procedure that set the October 15, 2009 deadline under
the Administrative Procedure Act (“APA”), the Court proceeds, provisionally, by presuming that
the IRS regulation was validly promulgated. If so, the plaintiff’s refund claim was not timely
under ARRA or Revenue Procedure 2009-26, rendering the Court unable to exercise jurisdiction.

               3.      Refund Claims Under I.R.C. § 6511(d): Business-Bad-Debt Claims

        Section 6511(d) sets forth an extended limitation period for filing a refund claim when
the taxpayer seeks a refund related to a business-bad-debt deduction. Section 6511(d)(1)
provides that if the refund claim concerns “the deductibility by the taxpayer, under section 166 or
section 832(c), of a debt as a debt which became worthless, . . .” then:

               in lieu of the 3-year period of limitation prescribed in subsection (a),
               the period shall be 7 years from the date prescribed by law for filing
               the return for the year with respect to which the claim is made. If
               the claim for credit or refund relates to an overpayment on account
               of the effect that the deductibility of such a debt or loss has on the
               application to the taxpayer of a carryback, the period shall be either
               7 years from the date prescribed by law for filing the return for the
               year of the net operating loss which results in such carryback or the
               period prescribed in paragraph (2) of this subsection, whichever
               expires the later.

I.R.C. § 6511(d)(1). The reference to paragraph (d)(2) is not relevant to this case.

         For a taxpayer to take advantage of the extended seven-year statute of limitations of
I.R.C. § 6511(d), the statute expressly requires that the taxpayer’s refund claim seek a deduction
for a bad business debt under I.R.C. § 166. Section 166 permits an individual taxpayer to deduct
in full, against ordinary income, a business bad debt that becomes worthless and to deduct that
debt against ordinary income for other years as a NOL carryback or carryover. Estate of Mann v.
United States, 731 F.2d 267, 272 n.7 (5th Cir. 1984). Non-business debt, in contrast, is treated as

                                                  8
a short-term loss subject to limitations on deductibility. See I.R.C. §§ 1211, 1212; United States
v. Generes, 405 U.S. 93, 96 (1972).

       Mr. Devine filed his tax return claiming a business-bad-debt deduction on April 11, 2016,
which is within seven years of April 15, 2009, the deadline for filing a return for tax year 2008.
His refund claim would therefore be timely under I.R.C. § 6511(d). The plaintiff bears the
burden, however, of demonstrating that he satisfies the requirements for an election under I.R.C.
§ 166—namely, that he had a business bad debt that became worthless in 2008—in order to take
advantage of the extended limitations period of I.R.C. § 6511(d). Should the plaintiff not satisfy
the requirements for claiming a business bad debt, his refund claim would be untimely, and the
Court would be unable to exercise jurisdiction.

         The initial point of decision, therefore, is whether the plaintiff has carried his burden of
showing by a preponderance of the evidence that his claim is for a business bad debt such that he
is able to demonstrate that it is timely and that the Court has jurisdiction to entertain it.

       III.    DISCUSSION

        The plaintiff seeks to carry back a NOL from 2008 to tax years 2003 -2005 under I.R.C.
§ 6511(d). To do so he must establish a legal claim to a business-bad-debt deduction. The
plaintiff therefore must demonstrate that: (1) he had a bona fide debt; (2) that debt was a business
debt; and (3) that debt became worthless in 2008. See I.R.C. § 166; 26 C.F.R. § 1.166-1(c).

       A.      Business-Bad-Debt Deduction: Bona Fide Debt

               1.      Legal Standard

       For Mr. Devine to seek a deduction for a bad business debt owed to him, the debt must be
a bona fide debt. A bona fide debt under I.R.C. § 166 is “a debt which arises from a debtor-
creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable
sum of money.” 26 C.F.R. § 1.166-1(c). A contribution to capital is not considered a debt. Id.
“Advances made by an investor to a closely held or controlled corporation may properly be
characterized, not as a bona fide loan, but as a capital contribution.” Rutter v. C.I.R., T.C. Memo
2017-174, 2017 WL 3974095, at *6.

        The distinction between debt and equity has engendered a great deal of dispute over the
years due to the distinctive tax treatment of each. See, e.g., A.R. Lantz & Co. v. United States,
424 F.2d 1330, 1331 (9th Cir. 1970). The analysis of whether advances of funds should be
treated as debt or equity “must be considered in the context of the overall transaction.” Hardman
v. United States, 827 F.2d 1409, 1411 (9th Cir. 1987).

       Courts have used a variety of factors to determine whether a bona fide debt exists
between two parties such as would create a relationship between them as debtor and creditor.
The focus of the inquiry is on the intent of the parties. A.R. Lantz, 424 F.2d at 1333.

               The Ninth Circuit has developed a test that identifies 11 “factors
               which to varying degrees influence the resolution of the debt-equity
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               issue.” Id. These factors are: (1) The names given to the certificates
               evidencing the indebtedness; (2) the presence or absence of a
               maturity date; (3) the source of the payments; (4) the right to enforce
               the payment of principal and interest; (5) participation [in]
               management; (6) a status equal to or inferior to that of regular
               corporate creditors; (7) the intent of the parties; (8) “thin” or
               adequate capitalization; (9) identity of interest between debtor and
               stockholder; (10) payment of interest only out of “dividend” money;
               (11) the ability of the corporation to obtain loans from outside
               lending institutions.
Hardman, 827 F.2d at 1412 (citations omitted).

        In an earlier case involving an individual taxpayer, the Ninth Circuit applied a test of six
factors: (1) the existence of a contingency upon which the obligation to repay relies that has not
occurred; (2) the absence of a fixed maturity date; (3) a lack of a note or other evidence of
indebtedness; (4) a provision for interest or security; (5) evidence that the creditor ever made a
demand for repayment; and (6) an indication that the creditor continued to advance money long
after he could have reasonably believed there was any possibility of repayment. Zimmerman v.
United States, 318 F.2d 611, 613 (9th Cir. 1963).

        Other courts have also considered various lists of factors set forth in the context of
determining whether funds advanced to a corporation by a shareholder should be construed as
debt or equity, and consequently whether reimbursement constitutes loan repayment or dividend
distributions. E.g., Estate of Mixon v. United States, 464 F.2d 394, 402 (5th Cir. 1972).

        The Ninth Circuit has more recently engaged in a thorough elucidation of its governing
test of determining debt or equity. In Hewlett-Packard, the court distinguished between the
intent-based test favored by the Ninth Circuit and a simpler conception that would merely ask
whether an instrument functions more like debt or equity, ultimately concluding that the two tests
will often merge. Hewlett-Packard Co. v. C.I.R., 875 F.3d 494, 498-99 (9th Cir. 2017). The
court explained that its test:

               is “primarily directed” at determining whether the parties
               subjectively intended to craft an instrument that is more debt-like or
               equity-like. A quest for subjective intent always requires objective
               evidence, hence the eleven factors. On this account, all factors on
               the list could be described as “evidence of intent.” Direct, objective
               evidence of intent—say, an e-mail from an executive stating he
               wishes to create an unalloyed debt instrument—is one of the eleven,
               and it matters. But assertions of intent don’t resolve our inquiry,
               which considers all the “circumstances and conditions” that speak
               to subjective intent. Proclaiming an intent to create an instrument
               that is “debt” or “equity” doesn’t make it so.
                      [The Ninth Circuit’s] precedent’s preoccupation with intent
               is nonetheless a little puzzling, since it suggests that a taxpayer could
                                                  10
               achieve debt treatment for an instrument that functions as equity (or
               vice versa), so long as he had the right state of mind in crafting the
               instrument. Were we writing on a barren slate, we might say that
               our test is simply directed at determining whether an instrument
               functions more like debt or equity. There’s nothing magical about
               intent. Nonetheless, we believe our circuit’s roundabout intent-
               based test merges with this simple function test in all but a few
               outlandish cases.

Id. (citations omitted).

        In seeking to determine the taxpayer’s intent and the way the instrument functions, the
factors set forth in these cases are not of equal significance, and no single factor is determinative.
Recklitis v. C.I.R., 91 T.C. 874, 901-02 (1988). Courts instead examine each case on its facts and
apply and evaluate the factors most significant to the issues at hand. See A.R. Lantz, 424 F.2d at
1333 (explaining that resolution of debt–equity question “depends on the facts of each case”).

         As the Third Circuit has explained, the factors developed by various courts serve as “aids
in answering the ultimate question whether the investment, analyzed in terms of its economic
reality, constitutes risk capital entirely subject to the fortunes of the corporate venture or
represents a strict debtor-creditor relationship.” Fin Hay Realty Co. v. United States, 398 F.2d
694, 697 (3d Cir. 1968). In this summary of the test, Fin Hay neatly encapsulates Hewlett-
Packard’s functionality test.

        There is a dispute among courts as to whether the characterization of an advance as either
a debt or a contribution to capital presents primarily a question of law or of fact. The Fifth and
Eleventh Circuits treat the issue as a legal question. See Texas Farm Bureau v. United States,
732 F.2d 437, 438 (5th Cir. 1984); In re Lane, 742 F.2d 1311, 1315 (11th Cir. 1984). The Ninth,
Fourth, and Sixth Circuits treat the issue as primarily a factual question. See Bauer v. C.I.R., 748
F.2d 1365, 1367 (9th Cir. 1984); Jewell Ridge Coal Corp. v. C.I.R., 318 F.2d 695, 698 (4th Cir.
1963); Indmar Prods. Co. v. C.I.R., 444 F.3d 771, 777 (6th Cir. 2006). The D.C. Circuit has
effectively found the inquiry to be a mixed question of applying facts to a fact-specific legal
standard. Cerand & Co., Inc. v. C.I.R., 254 F.3d 258, 260 (D.C. Cir. 2001). The Court has
found no case from the Federal Circuit elaborating the nature of the issue before the Court.

        Because Mr. Devine is a resident of California and all relevant acts occurred there, the
Court will apply the Ninth Circuit’s law and treat the question as one of fact. Ultimately, the
characterization of the debt–equity question as one of fact or law, or a mixed question, is not
determinative of the outcome in this case. The Court would reach the same conclusion under
any of these standards.

       While the issue before the Court ultimately depends on the plaintiff’s intent, that intent is
susceptible to resolution at this stage of the case based on the contract between the plaintiff and
Ms. Giliberti, if that contract is unambiguous. Indeed, the Court must resolve the question,
because jurisdiction over the plaintiff’s refund claim depends on its outcome. The Court has
reviewed the documentation relevant to resolving the nature of the plaintiff’s advances; namely,
                                                 11
the Co-Tenancy Agreement and the Side Letter (collectively, “the 2004 Agreements”) between
Mr. Devine and Ms. Giliberti. This documentation, by its own terms, is the sole contract
between the parties from the time they executed the 2004 Agreements.

        The interpretation of an unambiguous contract is a question of law. Medlin Constr. Grp.,
Ltd. v. Harvey, 449 F.3d 1195, 1199-1200 (Fed. Cir. 2006); In re U.S. Fin. Sec. Litig., 729 F.2d
628, 632 (9th Cir. 1984). Contact interpretation requires a determination of the parties’ intent,
Shell Oil Co. v. United States, 751 F.3d 1282, 1304 (Fed. Cir. 2014), but that intent is found
within the text of the contract itself when that instrument is unambiguous. When a contract is
ambiguous, it may be interpreted by considering extrinsic evidence. TEG-Paradigm Env’t, Inc.
v. United States, 465 F.3d 1329, 1338 (Fed. Cir. 2006). An ambiguity begins a shift in contract
interpretation from a question of law to one of fact. See CITGO Asphalt Refin. Co. v. Frescati
Shipping Co., Ltd., 140 S. Ct. 1081, 1088 (2020) (noting that “when a written contract is
ambiguous, its meaning is a question of fact, requiring a determination of the intent of the parties
in entering the contract; that may involve examining relevant extrinsic evidence of the parties’
intent and the meaning of the words that they used”) (quoting 11 Williston on Contracts § 30:7)
(internal quotations omitted).

        The Court finds the documents constituting the full scope of the 2004 Agreements
between Mr. Devine and Ms. Giliberti to be unambiguous. The Court can resolve their effect as
a matter of law. The Court therefore may also evaluate the expectations of the parties to the
contract and the factual questions stemming therefrom to inform its jurisdictional inquiry. See
Martinez v. United States, 48 Fed. Cl. 851, 857 (2001) (noting in the context of evaluating
jurisdictional facts that “the court may, and often must, find facts on its own”), aff’d in relevant
part, 281 F.3d 1376 (Fed. Cir. 2002).

        As discussed above, the Court must evaluate the arguments in support of a business-bad-
debt deduction as jurisdictional facts that assist the Court in determining whether jurisdiction to
consider the plaintiff’s claim exists. The resolution of the debt-equity question and the
interpretation of the unambiguous controlling documents, whether viewed as either questions of
fact or of law, are merely relevant factual evidence “in order to resolve the factual dispute” at
hand—namely, to assess whether the case is within the ambit of the Court’s jurisdiction.
Rocovich, 933 F.2d at 994. Thus, the overall inquiry remains a factual one, even when the Court
makes preliminary legal determinations in support of its factual findings.

               2.      Analysis

       The taxpayer bears the burden of proof to establish that “a purported debt is in substance
and fact a debt for tax purposes.” VHC, Inc. v. C.I.R., T.C. Memo 2017-220, 2017 WL 5157771,
at *17. This burden is consistent with the plaintiff’s burden to demonstrate jurisdiction.

       The Court recognizes that Ms. Giliberti had an obligation to repay the advances Mr.
Devine contributed to the Solar Drive project. Nevertheless, no bona fide debt existed for tax
purposes. The Court finds few indicia that the parties established a debtor-creditor relationship,
as evidenced most significantly by the lack of evidence of indebtedness, the parties’ own intent
and expectations, and the lack of interest sought or paid.
                                                 12
                      a.     Evidence of Indebtedness

        The Court begins its analysis of the relevant facts with the agreement between Mr.
Devine and Ms. Giliberti, which is to be interpreted in order to give effect to the intent of the
parties at the time the 2004 Agreements were executed. Cal. Civ. Code § 1636. The Court looks
to California law to determine the intent of the parties to the agreement because the parties
stipulated in the 2004 Agreements that any disputes would be resolved under California law.

        Mr. Devine and Ms. Giliberti expressly contemplated that one co-tenant might incur a
debt to the other co-tenant by making loans in support of the Solar Drive project and provided
for such events. The co-tenants signed a Side Letter on May 6, 2004 and incorporated into their
Side Letter their Co-Tenancy Agreement, contemporaneously with the purchase of Solar Drive.

         The Co-Tenancy Agreement provides in paragraph five that “[n]o Co-Owner may
advance funds to another Co-Owner to meet expenses associated with that Co-Owner’s
Ownership Interest, unless the advance is recourse to the Co-Owner and is for a period not to
exceed 31 days. Such advances shall be evidenced by a Promissory Note containing a market
rate of interest.” (Pl. Resp. Ex. B ¶ 5.)

       The Side Letter provides in paragraph 6 that:

              In the event the Co-Owners execute promissory note(s) between the
              two of them and said promissory note(s) relate to the Property (the
              “Promissory Note”), the maker under the Promissory Note shall
              have the one time option to extend the due date of the Promissory
              Note for 31 days by delivering written notice to the payee prior to
              the due date stated in the Promissory Note. All Promissory Notes
              shall be paid in full upon the due date stated in the Promissory Note
              or the sale or refinance of the Property, whichever shall come first.
              In the event of a sale or refinance of the Property, any unpaid
              Promissory Notes shall be paid directly from the escrow that
              receives the proceeds of the refinance or sale.

(Pl. Resp. Ex. C ¶ 6.) Both documents include an integration clause that establishes the 2004
Agreements as the sole agreement between the parties.

        Based on these provisions, the parties understood at the time they entered into the 2004
Agreements the significance of promissory notes and contemplated their use in relation to the
Solar Drive project. The parties’ express agreement is the best indicator of their contemporary
intent regarding the nature of the payments Mr. Devine was advancing. The parties made
express provision that when Mr. Devine advanced funds to meet the expenses of Ms. Giliberti,
thereby incurring debt, such advances would be captured in promissory notes on which market-
rate interest was due, payable within 31 days (except as the payment deadline may be extended
pursuant to paragraph 6 of the Side Letter). The parties’ 2004 Agreements specifically forbid
advances of funds made in the absence of the execution of promissory notes. Under the 2004

                                               13
Agreements, Mr. Devine’s advances were understood by the parties to be infusions of capital to
the Solar Drive project as a whole and not debts from one partner to the other.

        No promissory note or other documentation setting forth a payment obligation was
executed by the parties in connection with the funds advanced by Mr. Devine. “The issuance of
promissory notes may suggest that advances are debt.” VHC, Inc. v. C.I.R., 2017 WL 5157771,
at *18; see also Zimmerman, 318 F.2d at 613. The “absence of a formal loan agreement is not
determinative, but the absence of a formal loan agreement is certainly relevant.” DF Systems,
Inc. v. C.I.R., 548 F. App’x 247, 249 (5th Cir. 2013).

        The absence of any formal loan agreements is especially relevant when Mr. Devine
signed the 2004 Agreements that explicitly contemplated the use of promissory notes for loans
between the parties. The 2004 Agreements reflect that he understood what a promissory note
was and how it would be used in relation to the Solar Drive project. His acumen as a senior
music industry executive, his employment of a bookkeeper for his real-estate business, and the
assistance he received from lawyers in drafting the Side Letter suggest that he had the resources
at his disposal to execute a promissory note or similar documentation. Cf. Recklitis, 91 T.C. at
902 (declining to impute a debt instrument in the transaction given that the taxpayer was a
“highly sophisticated businessman” who was “fully cognizant of the significance of a formally
executed note and underlying security to a lender”). Mr. Devine, however, has put forth no
evidence that a promissory note or any similar loan agreement was executed to create a debtor-
creditor relationship between Ms. Giliberti and himself.

         The plaintiff suggests that the 2004 Agreements themselves constitute a loan agreement
because the Co-Tenancy Agreement designates 50 percent of all amounts advanced by Mr.
Devine as a loan. One looks in vain for such an express provision or combination of provisions
in the 2004 Agreements, and the Court finds no basis on which to affirm the plaintiff’s assertion
in this regard. The 2004 Agreements do not refer to a loan amount, a maturity date for the
alleged loans, a rate of interest (except, as previously noted, to be paid on any promissory notes
executed pursuant to the Side Letter), a right of enforcement, or other attributes typically
reflected in a loan agreement.

       Even if such an inference could be drawn from the express terms of the 2004
Agreements, the Court finds that the 2004 Agreements are insufficient on their own to support
the weight the plaintiff seeks to attach to them when they expressly contemplated a further step:
the execution by the co-tenants of a promissory note or notes in support of any “loans.”

        In the absence of any contemporaneous documentation satisfying the express terms of the
parties’ own 2004 Agreements evidencing that the funds advanced were loans, as opposed to
capital investments, the Court finds that this factor weighs against finding that the plaintiff
intended to incur a bona fide debt.

                       b.     Parties’ Intent

        On the question of the parties’ intent at the time they entered into the 2004 Agreements, it
is helpful to evaluate the co-tenants’ expectations at the time of execution. As the 2004

                                                14
Agreements have a choice-of-law clause that identifies California law as governing the parties’
agreement, the Court turns to local law to determine the co-tenants’ reasonable expectations at
the time of execution and what they intended in signing the document.

       In this case, local law proves useful in determining the context underlying the 2004
Agreements. Under California law, co-tenants who have assented to improvements are liable for
funds expended by the other in excess of the co-tenant’s fractional share of the property.
Higgins v. Eva, 204 Cal. 231, 267 (1928); Wallace v. Daley, 220 Cal. App. 3d 1028, 1036
(1990); Shenson v. Shenson, 124 Cal. App. 2d 747, 754-55 (1954); Mercola v. Chester, 97 Cal.
App. 2d 140, 143 (1950). Indeed, the California Supreme Court has held that the “right of a
cotenant making the payment in excess of his proportion to recover payment from the other
cotenant his share thereof arises at the date when any such expenditure is made.” Willmon v.
Koyer, 168 Cal. 369, 372-73 (1914).

        The co-tenants created the 2004 Agreements against the backdrop of existing state law
that provided to Mr. Devine the full protection of law to ensure the reimbursement of his
financial advances under the 2004 Agreements. California law provided all the protection
needed to guarantee Mr. Devine repayment of funds advanced as capital to the Solar Drive
project. As the 2004 Agreements recognized by their express terms, only if one co-owner loaned
funds to the other for the purpose of meeting “expenses associated with that Co -Owner’s
Ownership Interest,” as recounted by the Co-Tenancy Agreement, was there otherwise a need for
a promissory note and recourse debt. The latter is the only type of loan expressly accounted for
in the 2004 Agreements, and no such loans were made.

                       c.      Interest

        Also significant is the lack of any provision for the payment by Ms. Giliberti of interest
on the funds advanced by Mr. Devine. “[A] true lender is concerned with interest.” Curry v.
United States, 396 F.2d 630, 634 (5th Cir. 1968); see also Sellers v. C.I.R., T.C. Memo 2000-
235, 2000 WL 1061224, at *7 (“Failure of the putative lender to insist on interest payments
suggests that he is instead interested in the . . . increased market value of his ownership interest,
thereby indicating equity contributions.”); Slappey Drive Indus. Park v. United States, 561 F.2d
572, 582 (5th Cir. 1977) (noting that, in the case of shareholder loans to a corporation, when “a
corporate contributor seeks no interest, it becomes abundantly clear that the compensation he
seeks is that of an equity interest; a share of the profits or an increase in the value of his
shareholdings”). A provision for interest or security is one of the factors identified in
Zimmerman and often cited by the Tax Court. See, e.g., Estate of Lockett v. C.I.R., T.C. Memo
2012-123, 2012 WL 1434988, at *7; Vinikoor v. C.I.R., T.C. Memo 1998-152, 1998 WL 201755,
at *4; Miller v. C.I.R., T.C. Memo 1996-3, 1996 WL 10259, at *7.

         The reason courts look to whether a purported lender charged interest is that the use of
money is not free. By advancing funds to the Solar Drive project, Mr. Devine was losing the use
of those funds for other purposes. That is always true: money used for one purpose is not
available for another purpose. As a result, those who lend money charge interest to cover the
cost to themselves of the money’s unavailability. Charging interest is the norm when a person
makes a loan. If a person is putting in equity, however, interest is not charged, because the
                                                 15
whole aim of advancing the funds as equity is to increase the overall value of the investment; the
profit on the loss of the use of the money will in theory be more than covered by the increase in
the value of the investment.

       Perhaps if Ms. Giliberti were a member of Mr. Devine’s family or a friend of long
standing or had some other personal relationship with him, the absence of interest on the
advances could be explained away (although such cases require special attention to ascertain
whether the advances are actually gifts). Perhaps, on the other hand, the absence of interest
could be explained if Mr. Devine were extending loans for only a brief period, rendering the cost
to him of foregoing use of his own money negligible. Neither scenario is the case. The two co-
tenants met in connection with the Solar Drive project. Their relationship was an arm’s length,
business partnership. In such a case, it is hard to conceive of one partner making loans to the
other without any provision for interest, and the plaintiff does not try to explain it.

        Instead, the plaintiff argues that the Co-Tenancy Agreement does provide for interest:
any advance would be “evidenced by a Promissory Note containing a market rate of interest.”
(Pl. Resp. Ex. B.) The plaintiff’s argument on this point cannot stand, however, because he
never exercised his right under this provision. Ms. Giliberti and Mr. Devine never executed any
promissory notes reflecting recourse debt at market interest rates for the funds he advanced .

        The Court recognizes that during later proceedings between the former co-tenants Mr.
Devine made a claim for interest on his advances. In Ms. Giliberti’s bankruptcy proceeding, Mr.
Devine filed a proof of claim evidencing the funds she owed to him and Solar Drive, LLC. (Pl.
Resp. Ex. N.) The claim listed numerous categories of debts, including 50 percent of the costs
of insurance, labor, and mortgage payments. The claim sought, in relation to those debts,
“[i]nterest on the foregoing at the maximum rate allowed by law.” (Id.) The 2008 Agreement
that the co-tenants executed to settle the plaintiff’s claim against Ms. Giliberti also noted that the
payments due to Mr. Devine under its terms “shall accrue simple interest at the rate of 7.5%.”
(Pl. Resp. Ex. O.) The Court evaluates the 2008 Agreement in more detail below.

         While his later demands for the payment of interest demonstrate that Mr. Devine did seek
to recover interest charges on his advances, there is no evidence to suggest that the co-tenants
expected to pay interest and set an interest rate for Mr. Devine’s advances at the time he made
them. The post hoc demand for interest came after the parties’ relationship had soured; they
were adversaries in litigation. Seeking interest in 2008 on the amounts allegedly due to him to
settle subsequent litigation does not create any ambiguity with respect to the 2004 Agreements
sufficient to support a claim that Mr. Devine sought interest from the outset at the time he made
the advances, beginning in 2004, as a true lender would have.

                       d.      Additional Factors

       Not only are no certificates of indebtedness to be found in the record, and no interest
charges levied at the time the funds were advanced, but there is no maturity date for the alleged
loans. Again, the 2004 Agreements provided for a maturity date for any loans reflected by
promissory notes between the co-tenants, but no such notes were executed. Otherwise, the
advances were made with no set repayment date. Mr. Devine’s and Ms. Giliberti’s 2004
                                                 16
Agreements reflect an intent to refinance the mortgage on Solar Drive and to use the proceeds
from the refinancing to “reimburse the Co-Owners for any monies they spent to improve or
repair the property . . . .” (Pl. Resp. Ex. C ¶ 4.) While the 2004 Agreements evince the intent of
the parties to those agreements to reimburse Mr. Devine for his advances, they contain no fixed
date of repayment. Whether the parties contemplated reimbursing Mr. Devine from rental
proceeds, refinancing the property, or selling Solar Drive, these events were all aspirational at
the time the 2004 Agreements were entered into and Mr. Devine advanced the monies to
improve the property. The aspiration to repay him for his advances without any fixed or target
date by which to do so is more reflective of equity advances than it is of loans.

        As far as Mr. Devine’s ability to enforce his right to repayment of principal and interest,
such a right inured to him due to his role as co-tenant. He enjoyed no special right or priority
under the 2004 Agreements, however, to enforce payment of the principal, as the 2004
Agreements provided no additional or specific right to enforce repayment, except to the extent
such payments had been made pursuant to the express provision of making a recourse loan to
Ms. Giliberti reflected in promissory notes. As the 2004 Agreements recognized, lien holders on
the Solar Drive property, i.e., outside lenders, had senior rights to payment on their loans before
the co-tenants would be “reimburse[d] . . . for any monies they spent to improve or repair the
property.” (Id. ¶¶ 4, 6.)

        Under the 2004 Agreements, the obligations owed to Mr. Devine were expressly
subordinated to lenders. The absence of any special or priority right of enforcement additional to
Mr. Devine’s right as co-tenant under California law and the subordination of his right to
repayment for the funds he advanced weigh against treating those advances as loans and support
treating them as equity investments.

        Another factor supporting the conclusion that the monies advanced by Mr. Devine were
investments and not loans is the fact that he continued to provide funds for Solar Drive even after
the deterioration of his relationship with Ms. Giliberti. At that point in the arrangement, Mr.
Devine would have had more than an inkling that she was not likely to repay the advances; his
chance to recoup his money was by enhancing the value of the Solar Drive property by
continuing to make improvements. (See ECF 36, Def. Mot. Ex. 3, A026 (demonstrating that Mr.
Devine advanced funds to the Solar Drive project in 2007 and 2008, after Ms. Giliberti had filed
for bankruptcy in 2006).) See Zimmerman, 318 F.2d at 613 (noting that one factor is whether the
creditor reasonably believed there was any possibility of repayment); LeBloch v. C.I.R., T.C.
Memo 2007-145, 2007 WL 1670389, at *10 (finding that the parties’ working relationship
created an understanding that funds advanced to one another would be repaid), rev’d in part on
other grounds, 311 F. App’x 960 (9th Cir. 2009); cf. Montgomery v. United States, 87 Ct. Cl.
218, 230 (1938) (denying a deduction when the creditor knew the debtor’s business was
struggling).

        Other factors from the Ninth Circuit test are also suggestive that the advances were
investments in the property and not loans from Mr. Devine to Ms. Giliberti: (1) the Solar Drive
project had difficulty obtaining other financing; and (2) the monies to repay Mr. Devine’s
advances were intended to come from loans obtained by refinancing the Solar Drive property.

                                                17
        On the other hand, countering the weight of the factors analyzed thus far, several facts
may be construed to support the plaintiff’s claim. Although the advances were unsecured, under
the 2004 Agreements Mr. Devine could rely on Ms. Giliberti’s 50 percent ownership interest in
the property itself as security; that reliance was equally based, as noted, on California’s law on
co-tenancy and insufficient to counter the factors previously discussed. The plaintiff also made
multiple demands for repayment, including ultimately having to pursue adversary proceedings in
bankruptcy court. In addition, the obligation to repay was not subject to any contingency that
had not occurred. See Zimmerman, 318 F.2d at 613 (considering such factors as whether there
was any provision for security, demand for repayment, or whether the obligation to repay was
subject to a contingency). Even weighed together in the balance, however, these factors are
insufficient to enable the plaintiff to carry his burden of showing by preponderant evidence that
his claim may take advantage of the extended statutes of limitation he seeks to invoke.

       Mr. Devine, as co-owner of half the property, expressly had an equal role in managing
the Solar Drive project under paragraph 2 of the Co-Tenancy Agreement. Flowing out of his
equal ownership interest, his role in managing the property does not appear to have depended on
the monies he advanced, whether they were equity or debt. This factor is neutral.

               3.      Effect of 2008 Purchase and Settlement Agreement

        The 2008 Agreement between Mr. Devine and Ms. Giliberti offers the most significant
support for the plaintiff’s position. In it, as previously noted, the two co -tenants agreed that half
of the funds supplied by Mr. Devine for the down payment on Solar Drive “was deemed to be a
loan” to Ms. Giliberti.3 In an arrangement between two individuals, it is those individuals
themselves who determine whether funds are equity or debt, as long as the objective indicia
support that determination. See Hewlett-Packard, 875 F.3d at 498-99. In the 2008 Agreement,
the two parties to the 2004 Agreements specifically characterize a portion of Mr. Devine’s
advances under the 2004 Agreements as debt to Ms. Giliberti. That characterization is entitled to
deference, and if the 2004 Agreements could be read in any way to create a question regarding
the nature of Mr. Devine’s advances, that 2008 characterization of the funds he advanced would
provide probative evidence that would support the plaintiff’s position.

       The problem for the plaintiff is that the 2004 Agreements, as analyzed above, offer no
support for the characterization in the 2008 Agreement that Mr. Devine’s advances did in fact
function as debt to Ms. Giliberti. The 2008 Agreement between the parties is extrinsic and not

    3In bankruptcy, equity can be recharacterized as debt. In re L. Scott Apparel, Inc., 615 B.R.
881, 888 (C.D. Cal.), appeal dismissed, 2020 WL 6492082 (9th Cir. 2020); In re Daewoo Motor
America, Inc., 471 B.R. 726, 729 (C.D. Cal. 2012), aff’d, 564 F. App’x 638 (9th Cir. 2014). The
2008 Agreement does not purport to change prospectively the nature of Mr. Devine’s advances,
converting equity to debt from the date of that Agreement. Had that been the case, the issue
before the Court in this case would be different. Instead, the 2008 Agreement seeks to
characterize retrospectively the advances as of the date they had been tendered and not to
recharacterize them going forward.

                                                 18
contemporaneous with the 2004 Agreements under which Mr. Devine advanced funds. Its
belated expression of the parties’ intent is not consistent with the unambiguous terms of the 2004
Agreements, which the parties to it specifically acknowledged therein represented the totality of
their agreement. In the face of the unambiguous terms of the 2004 Agreements, the extrinsic
evidence of the 2008 Agreement may not be used to interpret the earlier 2004 Agreements.
Skilstaf, Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1015 (9th Cir. 2012) (noting that the court
must exclude extrinsic evidence for an unambiguous contract); McAbee Const. Inc. v. United
States, 97 F.3d 1431, 1434-35 (Fed. Cir. 1996); Pacific Gas & Elec. Co. v. G.W. Thomas
Drayage & Rigging Co., 69 Cal.2d 33, 37 (1968).

        In addition, while the intent of the parties is central to the analytical framework of the
Ninth Circuit, that intent must match the “function” of the investment, Hewlett-Packard, 875
F.3d at 498-99, or its “economic reality,” Fin Hay, 398 F.2d at 697. In this instance, as
explained above, the parties’ intent, at least as expressed in 2008, is inconsistent with the
function and economic realities of Mr. Devine’s investments pursuant to the 2004 Agreements in
the Solar Drive project.

        For these reasons, the characterization of Mr. Devine’s initial contributions to the Solar
Drive project as “debt” in the 2008 Agreement fails to provide evidence contemporaneous with
his advances to contradict the factors evaluated by the Court previously and therefore does not
satisfy Mr. Devine’s burden of demonstrating that the Court has jurisdiction over the case.

         The 2008 Agreement could not recharacterize the underlying nature of Mr. Devine’s
advances to Ms. Giliberti, although it could have changed the nature of that obligation from that
date forward. It did not do so. The 2008 settlement of his claim against Ms. Giliberti arising
from Mr. Devine’s advances also did not constitute a new loan to Ms. Giliberti, but the
resolution of his suit against her. The 2008 Agreement thus did not serve to create a loan of the
sort this Court could recognize as a valid debt.

        The 2008 Agreement instead functions as a settlement to litigation. It establishes a
schedule under which Ms. Giliberti will pay Mr. Devine the damages she agrees are due him.
She may have been willing retroactively to agree with Mr. Devine in characterizing the nature of
the basis on which damages were due, but that willingness does not on its own alter the objective
characterization of the advances at the times they were made for the reasons previously outlined.

        The 2008 Agreement also contains provisions for the payment of interest as well as fixed
dates by which Ms. Giliberti had to provide payment to Mr. Devine. While those are attributes
of debt, as opposed to equity, they are irrelevant to the issue before the Court. The 2008
Agreement resolves litigation between Mr. Devine and Ms. Giliberti. In effect, it provides for a
structured settlement of his claims against her. The schedule provided in the 2008 Agreement
does not provide fixed maturity dates for repayments of debt obligations but rather provides a
schedule for payment of damages. Likewise, the interest provided for in the 2008 Agreement is
not interest payable on funds loaned by Mr. Devine to Ms. Giliberti, but rather compensation due
because Ms. Giliberti was unable to pay the full amount of the damages at the time she agreed to
settle Mr. Devine’s claims against her, costing Mr. Devine the time-value of that unpaid portion
of the damages due.
                                                19
       The provisions of the 2008 Agreement do not affect and in no way alter the Court’s
conclusion that the 2004 Agreements between Mr. Devine and Ms. Giliberti did not establish a
debtor-creditor relationship between the two co-tenants on the Solar Drive project.

               4.     Conclusion

        Because there was no bona fide debt, the Court need not address whether the debt was a
business bad debt or whether it became worthless in 2008. Without a bona fide debt, the plaintiff
a fortiori cannot demonstrate that he had a business bad debt pursuant to I.R.C. § 166. As he
does not qualify for the deduction, he cannot rely upon the statute of limitations of I.R.C.
§ 6511(d), which extends the time to file a refund claim only for valid business-bad-debt
deductions under § 166. The plaintiff’s refund claim is therefore untimely, and this Court has no
jurisdiction to consider it. The Court must dismiss the plaintiff’s claim under RCFC 12(b)(1)
and 12(h)(3).

       B.      Additional Issues

       The parties have raised several additional issues in this case. The plaintiff challenges the
IRS’s implementation of ARRA, the statute that permits a five-year carryback for a 2008 NOL,
under the APA. He argues that the IRS Revenue Procedure that set October 15, 2009 as the
deadline for filing a refund claim was not promulgated according to APA standards.

         The defendant challenges the plaintiff’s 2008 NOL deduction on the theory of the duty of
consistency. Mr. Devine had previously claimed a $3,000,000 loss, to which the IRS acquiesced,
in relation to Solar Drive at the time of the property’s sale in 2011. The defendant argues that
the plaintiff cannot now seek a 2008 loss related to Solar Drive because it would result in a
double deduction and additional refund, and asks this Court to find the plaintiff is quasi-estopped
from asserting a business-bad-debt-deduction for 2008.

       Because the Court finds that the plaintiff’s refund claims were untimely, it does not have
any further jurisdiction over the case. The Court declines to reach the parties’ additional
arguments because it cannot exercise jurisdiction over untimely claims or address points made in
response to such claims.

       C.      Defendant’s Counterclaims

        The plaintiff claimed a business-bad-debt deduction in 2016, seeking to carry back a
2008 NOL to 2003, 2004, 2005, 2006, and 2007. While the IRS denied his claim as to tax years
2003-2005 due to untimeliness, the IRS granted a standard two-year carryback that allowed Mr.
Devine to seek a refund for 2006 and 2007. The IRS issued the plaintiff refund checks for both
years in February 2017.

        The defendant has counterclaimed in this case, arguing that the refunds issued for tax
years 2006 and 2007 were erroneously allowed because the plaintiff was not entitled to the
business-bad-debt deduction in 2008. It seeks to recover the amount allegedly erroneously
refunded. The defendant has requested a transfer of its counterclaims if the Court does not have
jurisdiction over the plaintiff’s claims.
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        To grant a motion to transfer claims under 28 U.S.C. § 1631, the Court must find that: (1)
it lacks jurisdiction; (2) the proposed transferee court is one in which the case could have been
brought at the time it was filed; and (3) the transfer is in the interest of justice. Paresky v. United
States, 139 Fed. Cl. 196, 203-04 (2018) (citing Jan’s Helicopter Serv., Inc. v. FAA, 525 F.3d
1299, 1303 (Fed. Cir. 2008)).

        First, the Court lost jurisdiction over the defendant’s counterclaims when it became
unable to exercise jurisdiction over the plaintiff’s claims. The Court originally had jurisdiction
over the defendant’s counterclaims. See 28 U.S.C. § 1346(c) (“The jurisdiction conferred by this
section includes jurisdiction of any set-off, counterclaim, or other claim or demand whatever on
the part of the United States against any plaintiff commencing an action under this section.” ).
I.R.C. § 7405(a) provides that “[a]ny portion of a tax imposed by this title, refund of which is
erroneously made, within the meaning of section 6514, may be recovered by civil action brought
in the name of the United States.”

        Because the plaintiff’s claim was rejected for lack of jurisdiction, however, “the
defendant’s counterclaim must be dismissed along with plaintiff’s complaint, without regard to
the merits of the counterclaim.” Western Mgmt., Inc. v. United States, 101 Fed. Cl. 105, 114
(2011), aff’d and remanded in part, 498 F. App’x 10 (Fed. Cir. 2012); Bryne v. United States,
127 Fed. Cl. 284, 299 (2016) (dismissing the government’s counterclaim along with the
plaintiff’s complaint under RCFC 12(b)(1)).

        Second, the transferee court must be one in which the case could have been brought. The
defendant has argued that the transferee court—the United States District Court for the Central
District of California—is one in which it could have brought its claims for recovery of erroneous
refunds. The Central District of California, Western Division, is the proper venue because Mr.
Devine is a resident of Los Angeles. See 28 U.S.C. § 84(c)(2). With respect to timing, the
plaintiff’s refunds for 2006 and 2007 were paid in February 2017. Because the defendant filed
its counterclaims in September 2018, the government has satisfied the requirements of I.R.C.
§ 6532(b), which allows the government to bring a claim for an erroneous refund within two
years of issuing it.

         Finally, the Court finds that a transfer would best serve the interest of justice given how
far this case has already progressed and the government’s interest in its resolution on the merits.

      Based on the factors set out in Jan’s Helicopter Service, the Court finds that it has
grounds to grant the defendant’s motion for a transfer of its counterclaims and will order that the
defendant’s refund claims be transferred to the Central District of California.

IV.    CONCLUSION

        Because the plaintiff did not have a bona fide debt, he has not established entitlement to a
business-bad-debt deduction under I.R.C. § 166. He therefore does not qualify for the extended
statute of limitations under I.R.C. § 6511(d) or under § 1211 of ARRA. As a result, only the
time limit of I.R.C. § 6511(a) applies to his refund claims for tax years 2003, 2004, and 2005.
Because these claims were filed outside the window allowed under I.R.C. § 6511(a), they are

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untimely. The Court therefore must dismiss his complaint for lack of jurisdiction pursuant to
RCFC 12(b)(1). Lacking jurisdiction over the complaint, the Court also lacks jurisdiction over
the defendant’s counterclaim. The counterclaim will be transferred, in the interest of justice, to
the Central District of California.

       The Court will issue a separate order in accordance with this opinion.

                                                                     s/ Richard A. Hertling
                                                                     Richard A. Hertling
                                                                     Judge

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