Court Opinion

ID: 9377928
Source: CourtListenerOpinion
Date Created: 2023-03-09 01:00:31.961041+00
Date Added: 2024-06-11T17:17:17.927403
License: Public Domain

Case: 22-40230         Document: 00516669870             Page: 1      Date Filed: 03/08/2023

              United States Court of Appeals
                   for the Fifth Circuit                                        United States Court of Appeals
                                                                                         Fifth Circuit

                                                                                       FILED
                                                                                   March 8, 2023
                                        No. 22-40230                              Lyle W. Cayce
                                                                                       Clerk

   Robert Gross,

                                                                    Plaintiff—Appellant,

                                             versus

   United States of America,

                                                                   Defendant—Appellee.

                      Appeal from the United States District Court
                          for the Southern District of Texas
                                USDC No. 2:20-CV-192

   Before Wiener, Stewart, and Engelhardt, Circuit Judges.
   Per Curiam:*
          Robert Gross appeals the district court’s dismissal of his claim for a
   tax refund under Internal Revenue Code (“I.R.C.”) § 1341. Because he fails
   to demonstrate that the district court erred in holding that he is not entitled
   to a refund under another provision of the tax code, we AFFIRM.

          *
              This opinion is not designated for publication. See 5th Cir. R. 47.5.
Case: 22-40230         Document: 00516669870               Page: 2      Date Filed: 03/08/2023

                                          No. 22-40230

                                   I.      Background
           Gross was a psychiatrist in Texas between 2007 and 2014. In October
   2014, he was indicted on fifty-two counts of health care fraud for submitting
   false claims for reimbursement to Medicare and Medicaid in violation of 18
   U.S.C. § 1347. His indictment alleged that he sought reimbursement for
   procedures he never performed and services rendered after patients had died.
   In 2015, Gross entered into a plea agreement with the Government in which
   he admitted to knowingly submitting a fraudulent Medicare claim for services
   provided to a then-deceased patient.
           Gross’s plea agreement included the following stipulations: (1) that
   restitution could be included as part of his sentence and would account for all
   of his actions, not simply the one count he was convicted of; (2) he would pay
   restitution     totaling      $1,832,869.21—representing              the     amount       of
   overpayments he received—to the Government for the victims of his fraud;
   (3) he would sign any documents necessary to facilitate his restitution
   payments; (4) the approximately $2 million that the Government seized from
   his various bank accounts would be applied toward any restitution he was
   ordered to pay; and (5) he would not contest the forfeiture of any funds to the
   United States. Ultimately, the district court sentenced Gross to 71 months in
   prison and ordered him to pay criminal monetary payments, including $1.8
   million in restitution. 1
           Gross later filed his 2016 tax return and sought a refund of
   $838,077.40 under § 1341. He based this amount on the $2.1 million he
   repaid to Medicare and other private insurance companies as part of his plea

           1
             Gross was also ordered to pay a fine of $100,000 and to forfeit any interest accrued
   in the funds that the Government seized.

                                                 2
Case: 22-40230        Document: 00516669870         Page: 3     Date Filed: 03/08/2023

                                     No. 22-40230

   agreement. The IRS, however, did not consider the merits of his refund
   request, so Gross filed suit.
          In his suit, Gross claimed that he was entitled to a tax refund
   under § 1341 because he paid taxes on income “which he reasonably thought
   he had an unrestricted right” to, and he was later required to pay the
   Government in accordance with his guilty plea agreement, “even though he
   was not guilty.” The Government moved to dismiss his complaint, first
   arguing that Gross did not and could not allege facts that would entitle him
   to relief under § 1341. It also asserted that he failed to allege that there was a
   separate basis for the deduction he claimed, which was required for relief
   under § 1341. In response to the Government’s latter contention, Gross
   averred that he had sufficiently alleged that he qualified for a deduction under
   I.R.C. § 162(a).
          The district court agreed with the Government and dismissed Gross’s
   case. It reasoned that: (1) Gross could not have believed that he had an
   unrestricted right to funds that he illegally obtained in a health care fraud
   scheme; and (2) restitution does not qualify for deduction of “ordinary and
   necessary expenses” under § 162(a) when paid pursuant to a criminal guilty
   plea. Gross timely appealed.
                         II.       Standard of Review
          “To survive a motion to dismiss, a complaint must contain sufficient
   factual matter . . . to state a claim to relief that is plausible on its face.”
   Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotations and citation
   omitted). We accept a plaintiff’s “well-pleaded facts as true, viewing them
   in the light most favorable to the plaintiff.” Allen v. Walmart Stores, LLC, 907
   F.3d 170, 177 (5th Cir. 2018).
          Whether a taxpayer is entitled to relief under § 1341 is a question of
   statutory interpretation that we review de novo. See Carder v. Cont’l Airlines,

                                           3
Case: 22-40230      Document: 00516669870           Page: 4    Date Filed: 03/08/2023

                                     No. 22-40230

   Inc., 636 F.3d 172, 174 (5th Cir. 2011) (explaining that questions of statutory
   interpretation are subject to de novo review).
                               III. Discussion
          Gross argues that he was entitled to a refund on his 2016 tax return
   because: (1) he subjectively believed that he had an “unrestricted right” to
   the income he earned in 2007-2014; and (2) his restitution payment was
   eligible for deduction under § 162(a). We disagree and deny him relief.
          Section 1341 “allows an income tax deduction to a taxpayer who
   previously received taxable income under a claim of right, but who must later
   repay some or all of that income.” Estate of Smith v. Comm’r, 198 F.3d 515,
   526 (5th Cir. 1999) (emphasis omitted). While § 1341 has numerous
   requirements, only two are pertinent to the instant appeal. First,
   under § 1341(a)(1), an item must be “included in gross income for a prior
   taxable year (or years) because it appeared that the taxpayer had an
   unrestricted right to such item[.]” Second, as we explained in Wood v. United
   States, § 1341 “only applies where the taxpayer is entitled to a deduction
   under another provision of the tax code.” 863 F.2d 417, 420 (5th Cir. 1989)
   (citing United States v. Skelley Oil Co., 394 U.S. 678, 683 (1969)).
   Regarding § 1341(a)(1)’s “unrestricted right” prong, we have expressly
   recognized that when the item at issue is “embezzled funds[,] it is clear that
   it could not appear to the taxpayer that he had any right to the funds, much
   less an unrestricted right to them.” McKinney v. United States, 574 F.2d 1240,
   1243 (5th Cir. 1978) (internal quotations omitted).
          Preliminarily, we examine our decision in McKinney. See 574 F.2d at
   1240. There, a taxpayer sought a refund after reporting and paying taxes on
   funds he obtained by embezzling money from his employer, the Texas
   Employment Commission. Id. at 1241. He relied on § 1341 as the basis for his
   entitlement to a refund for the taxes he paid. Id. A panel of this court reasoned

                                          4
Case: 22-40230       Document: 00516669870         Page: 5   Date Filed: 03/08/2023

                                    No. 22-40230

   that because § 1341 was enacted before embezzled funds could be legally
   counted as reportable income, Congress could not have intended to “give the
   benefits of [§ 1341] to holders of embezzled funds.” Id. at 1243. We have
   upheld that logic in subsequent cases. See, e.g., Wood, 863 F.2d at 420
   (explaining that the “unrestricted right” prong cannot be satisfied where
   funds were fraudulently obtained). Under this backdrop, we proceed to
   Gross’s claims.
          Gross contends that the district court’s reliance on McKinney is
   misplaced because this case does not involve embezzled funds, and he paid
   taxes on the income he earned. He also argues that his subjective belief that
   he had an unrestricted right to the income he earned through 2007 and 2014
   satisfies § 1341’s first prong. To evince his subjective belief, he highlights
   that from 2007 through 2014, he: (1) maintained an active Medicare license;
   (2) treated and billed patients; and (3) reasonably believed that he was
   entitled to the funds he received.
          Our case law does not foreclose Gross’s argument that we should look
   to his subjective belief that he had an unrestricted right to the funds he made
   from 2007 to 2014. In Wood, this court expressed its “reluctan[ce] to hold
   that a wholly subjective test of a claim of right to ill-gotten gains
   governs § 1341(a)(1).” 863 F.2d at 420. Instead, the panel recognized that
   even if the plaintiff “prevailed on his theory that McKinney is distinguishable
   or must be overruled, he must then furnish another statutory source for a
   deduction” in accordance with § 1341’s second prong. Id. Ultimately, the
   panel concluded that the plaintiff failed to provide another statutory source,
   as the second prong required. So, rather than address whether McKinney
   remained good law or if prong one warranted a subjective inquiry, the panel
   decided the case on § 1341’s second prong. Like in Wood, Gross fails § 1341’s
   second prong, so we need not weigh his arguments on the first prong.

                                          5
Case: 22-40230      Document: 00516669870             Page: 6   Date Filed: 03/08/2023

                                     No. 22-40230

           Section 162(a) permits a taxpayer to deduct “all the ordinary and
   necessary expenses paid or incurred during the taxable year in carrying on
   any trade or business.” See id. (1975). In turn, C.F.R. § 1.162-21(b)(1)(i)
   provides that a “fine or similar penalty” includes amounts “[p]aid pursuant
   to . . . a plea of guilty . . . for a crime (felony or misdemeanor) in a criminal
   proceeding[.]” According to Gross, the Government conceded that his
   business expenses between 2007 and 2014 were ordinary and necessary to his
   practice, so he is entitled to a deduction under § 162(a). In response, the
   Government points to § 162(f), which prohibits deductions “for any fine or
   similar penalty paid to a government for the violation of any law.” See id.
   (2012). It asserts that because Gross has not pleaded an alternate deduction
   to which he would be entitled, his claim fails. We agree.
           Here, Gross is not entitled to a tax refund because § 162(f) disqualifies
   him from a deduction under § 162(a). The district court ordered Gross to
   forfeit his property and use it for restitution payments. See 18
   U.S.C. § 982(a)(7) (providing that a district court, “in imposing sentence on
   a person convicted of a Federal health care offense, shall order the person to
   forfeit property, . . . that constitutes or is derived . . . from gross proceeds
   traceable to the commission of the offense”). Its order stemmed from his
   guilty plea, where he expressly agreed to pay restitution for his fraudulent
   behavior. His restitution order squarely falls within the legal definition of a
   “fine      or     similar     penalty.”      See      C.F.R. § 1.162-21(b)(1)(i).
   Consequently, § 162(f) disqualifies him from a deduction under § 162(a).
   Because Gross is not “entitled to a deduction under another provision of the
   tax code,” he fails § 1341’s second prong and has not stated a plausible claim
   for his requested tax refund. Wood, 863 F.2d at 420; Iqbal, 556 U.S. at 678.

                                           6
Case: 22-40230     Document: 00516669870           Page: 7   Date Filed: 03/08/2023

                                    No. 22-40230

                              IV.       Conclusion
          For the foregoing reasons, we AFFIRM the district court’s dismissal
   of Gross’s claim for a tax refund.

                                          7