Court Opinion

ID: 4314824
Source: CourtListenerOpinion
Date Created: 2018-09-24 17:00:26.363169+00
Date Added: 2024-06-11T14:44:54.536843
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

 THOMAS E. RUBIN,                                  No. 16-56633
                Plaintiff-Appellant,
                                                     D.C. No.
                      v.                          2:16-cv-02567-
                                                     RGK-JPR
 UNITED STATES OF AMERICA,
               Defendant-Appellee.                   OPINION

        Appeal from the United States District Court
           for the Central District of California
        R. Gary Klausner, District Judge, Presiding

            Argued and Submitted August 8, 2018
                    Pasadena, California

                   Filed September 24, 2018

  Before: Richard R. Clifton and Consuelo M. Callahan,
  Circuit Judges, and Kenneth M. Hoyt, * District Judge.

                    Opinion by Judge Clifton

     *
       The Honorable Kenneth M. Hoyt, United States District Judge for
the Southern District of Texas, sitting by designation.
2                   RUBIN V. UNITED STATES

                          SUMMARY **

                                 Tax

    The panel affirmed in part and reversed in part the
district court’s judgment in favor of the Government, and
remanded for further proceedings, in an action seeking a
refund of overpayments of personal income tax, based on a
claimed substantial overstatement of net income on
taxpayer’s corporation’s tax return by the bankruptcy trustee
who filed it.

    Taxpayer was the sole shareholder of a subchapter S
corporation, whose losses were not taxed at the corporate
level but instead flowed through to taxpayer as its sole
shareholder. The corporation was put into involuntary
bankruptcy. Taxpayer argued that the bankruptcy trustee
incorrectly accounted for cancellation of indebtedness
income and bad debts expenses that the corporation was
entitled to write off, resulting in a tax overpayment.

    At issue was whether taxpayer provided a “statement
identifying the inconsistency” between the corporate and
shareholder returns, as required by 26 U.S.C.
§ 6037(c)(2)(A)(ii). When he filed his personal tax return,
taxpayer included a statement that described how his income
flowed from the corporation and stated his disagreement
with the corporation’s tax return filed by the bankruptcy
trustee. He attached forms explaining why he disagreed with
the income and expenses reflected on the corporate tax

    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
                 RUBIN V. UNITED STATES                   3

return, and how his revised numbers would affect his
reported income, losses, deductions, and credits.

    The panel held that taxpayer’s filings satisfied § 6037.
The panel explained that the personal filings succeeded in
identifying the inconsistencies with the previously filed
corporate returns sufficiently for the Government to
understand them and to reject them on the merits. The panel
reversed the district court’s judgment in favor of the
Government for tax years 1998–2000. The panel affirmed as
to taxpayer’s abandoned appeal of his refund claim for tax
year 2001.

                       COUNSEL

Evan Christopher Borges (argued), Greenberg Gross LLP,
Costa Mesa, California for Plaintiff-Appellant.

Geoffrey J. Klimas (argued) and Bruce R. Ellisen, Attorneys,
Tax Division, United States Department of Justice,
Washington, D.C.; for Defendant-Appellee.

                        OPINION

CLIFTON, Circuit Judge:

    Plaintiff-appellant Thomas E. Rubin appeals the
judgment entered by the district court in favor of the
Government in his tax refund action. Rubin was the sole
shareholder of a subchapter S corporation. The income and
losses of the S corporation were not taxed at the corporate
level but instead flowed through to Rubin as its sole
shareholder. The corporation was put into involuntary
4                 RUBIN V. UNITED STATES

bankruptcy. Rubin contends that the net income for the
corporation was substantially overstated on the
corporation’s tax return by the bankruptcy trustee who filed
the return, resulting in personal income tax payments by
Rubin that were substantially more than he actually owed.
He filed amended tax returns seeking to obtain a refund of
the overpayments, but the Government denied the refund.
Rubin then filed a tax refund action in district court.

    The district court granted the Government’s motion for
judgment on the pleadings on the ground that Rubin had
failed to satisfy a statutory requirement for a return filed by
a shareholder of an S corporation. The requirement is that if
a tax return filed by the shareholder of an S corporation is
inconsistent with the corporation’s own return, the
shareholder must file “a statement identifying the
inconsistency.” 26 U.S.C. § 6037(c)(2)(A)(ii). The district
court concluded that Rubin had not filed such a statement
and granted judgment in favor of the Government.

     The issue presented in this appeal is whether the filings
by Rubin satisfied the requirement for “a statement
identifying the inconsistency.” We conclude that those
filings identified the inconsistencies between his tax returns
and those of the S corporation sufficiently to satisfy § 6037.
We reverse the judgment and remand for further
proceedings.

I. Background

    The S corporation that is the subject of Rubin’s action is
Focus Media, Inc. (“Focus”). Rubin and Focus both filed all
required tax returns and paid all required income taxes
during the relevant time period. Rubin’s tax returns
consistently reflected the flow-through income and losses
reported on Focus’s returns.
                 RUBIN V. UNITED STATES                     5

     By the year 2000, Focus was in serious financial
difficulties. It engaged in advertising placement, but some
of its largest customers became concerned about its possible
misuse of funds and sued the company to prevent additional
disbursements.      Focus was eventually enjoined from
collecting its unpaid receivables. Later that year, creditors
put Focus into involuntary bankruptcy. A bankruptcy trustee
was appointed and advised the bankruptcy court that Focus’s
receivables were worthless. The trustee filed Focus’s 2000
tax return. Rubin argues that the trustee incorrectly
accounted for $66,696,211 of cancellation of indebtedness
income and $23,110,349 of bad debts expenses that Focus
was entitled to write off.

    Rubin filed his personal tax return and paid his taxes
based on the income reported in the Focus return filed by the
trustee for tax year 2000. He later filed an amended personal
income tax return for that year, however, and also for the two
preceding years, 1998 and 1999. He included in his filing a
statement that described how his income flowed from Focus
and stated his disagreement with the tax return filed for
Focus by the bankruptcy trustee. He attached a pro forma
amended tax return for Focus for the 2000 tax year, which
reflected the different treatment of bad debt expenses and the
cancellation of indebtedness income. He also attached a pro
forma Schedule K-1 showing the income he contended
should have been reported to him based on the revised
numbers in the pro forma Focus return. A Schedule K-1 is
the form used by an S corporation to report the shareholder’s
share of income, losses, deductions and credits. The claims
for refunds in 1998 and 1999 were based on carrying losses
back to those years, again based on the revised figures in the
pro forma Focus 2000 return. In his amended returns Rubin
claimed tax refunds, based on the revised numbers, of
$2,564,260 for 1998, $595,218 for 1999, and $6,957,293 for
6                    RUBIN V. UNITED STATES

2000. Rubin also filed an amended return for 2001, but he
did not claim any refund for that year. 1

    The IRS disallowed all of Rubin’s amended tax refund
claims. In rejecting the claims, the IRS did not indicate that
the rejection was based on any failure by Rubin to identify
inconsistencies between his tax returns and Focus’s returns,
nor did the IRS suggest any uncertainty or confusion about
what Rubin was claiming or what Rubin’s filings reported.
All of the reasons provided by the IRS were based on the
merits of the claims.

    Rubin filed the current action against the Government in
2016, seeking over $10 million in tax refunds for tax years
1998 through 2001. The Government filed a motion for
judgment on the pleadings, requesting that the district court
dismiss Rubin’s claims without leave to amend. The district
court granted that motion, concluding that Rubin had not
filed with his amended tax returns a “statement identifying
the inconsistency” with the return filed on behalf of Focus,
as required by 26 U.S.C. § 6037(c)(2)(A)(ii). The court also
concluded that Rubin could not amend his complaint to
allege that he substantially satisfied the statutory
requirement because it had already been determined that
what he filed fell short, so the court dismissed the action with
prejudice.

    1
      The district court dismissed the 2001 claim as moot because Rubin
did not actually seek any refund for that year. Although his opening brief
purported to challenge that portion of the district court’s order, at oral
argument, Rubin’s counsel confirmed that this claim has been
abandoned. We do not further consider the 2001 claim.
                     RUBIN V. UNITED STATES                             7

II. Discussion

    We review de novo a district court’s grant of judgment
on the pleadings under Rule 12(c) of the Federal Rules of
Civil Procedure. Harris v. Cty. of Orange, 682 F.3d 1126,
1131 (9th Cir. 2012). A judgment on the pleadings is
properly granted when, assuming the truth of the allegations
in the non-moving party’s pleadings, the moving party is
entitled to judgment as a matter of law. Fajardo v. Cty. of
Los Angeles, 179 F.3d 698, 699 (9th Cir. 1999).

    The issue on appeal is whether Rubin’s amended returns
were properly rejected because they failed to satisfy the
requirements of 26 U.S.C. § 6037 when filed with the IRS.
Section 6037 is captioned “Return of S corporation.” The
heading of subsection 6037(c) accurately summarizes its
thrust: “Shareholder’s return must be consistent with
corporate return or Secretary notified of inconsistency.”

    Specifically, subsection 6037(c)(1) requires that the tax
return of a shareholder of an S corporation must report
income and loss consistently with what the corporation
reported on its return. 2 Subsection 6037(c)(2)(A) provides
an exception to the requirement for consistent treatment,
however. It states that if the corporation has filed a return
but the shareholder’s treatment is inconsistent with the return
filed by the corporation, subsection 6037(c)(1) “shall not

    2
      26 U.S.C. § 6037(c)(1) provides: “A shareholder of an S
corporation shall, on such shareholder’s return, treat a subchapter S item
in a manner which is consistent with the treatment of such item on the
corporate return.”
8                     RUBIN V. UNITED STATES

apply” if “the shareholder files with the Secretary a
statement identifying the inconsistency.” 3

    Rubin’s amended tax returns were not consistent with
Focus’s return, so they violated the requirement spelled out
in subsection 6037(c)(1). The question is whether he
qualified for the exception provided in subsection
6037(c)(2)(A) by filing “a statement identifying the
inconsistency.”

    Rubin’s amended returns for 1998, 1999, and 2000 were
all filed at the same time with a cover letter from his
accountant that suggested that they should be reviewed
together. The cover letter explained that the “first amended
return” was for the year 2000, and that the changes to that
return created a net operating loss that was available to be
carried back to 1998 and 1999. It referenced “the
explanations in Part II of each amended return.”

    3
        26 U.S.C. 6037(c)(2)(A) provides:

          (2) Notification of inconsistent treatment.–

               (A) In general. –In the case of any subchapter S
               item, if–

                   (i)(I) the corporation has filed a return but the
                   shareholder’s treatment on his return is (or
                   may be) inconsistent with the treatment of the
                   item on the corporate return, or

                   (II) the corporation has not filed a return, and

                   (ii) the shareholder files with the Secretary a
                   statement identifying the inconsistency,

               paragraph (1) shall not apply to such item.
                 RUBIN V. UNITED STATES                   9

    Part II of the amended return, Form 1040X, filed by
Rubin for tax year 2000 said “see attached statement.” The
attached statement consisted of two pages. The first was a
one-page chart that contained two lists of changes to the
Rubin tax return. The first listed “Summary Changes to
Income,” and the second “Summary of Changes to Itemized
Deductions (Schedule A).” To the right of the textual
descriptions of each change were three columns with
numbers, stating the figures “As Originally Reported,” then
“Net Change,” and finally “As Amended.”                 The
overwhelming bulk of the financial changes were reflected
in the first two income items. The first entry was “Schedule
D: Gain on sale of stock of Focus Media, Inc.” For that
entry, $30,379,112 was originally reported, the net change
was a subtraction of $16,809,110, and the amended amount
was $13,570,002. The second item was “Schedule E: Loss
from S Corporation, Focus Media, Inc.” For that entry, $0
was originally reported, the net change was a subtraction of
$30,563,376, and the amended amount was a loss of that
same amount, $30,563,376.

    The second page of the attachment consisted of four
paragraphs of text. All four paragraphs made explicit
reference to Focus and described the amendments as
resulting from the recalculation of what Rubin contended
should have been reported by Focus on its tax return. It
noted that the adjustments in income, including the two
largest items described above, “flowed from Focus Media,
Inc., an S Corporation in which the taxpayer was the sole
shareholder.” The statement continued:

       The bankruptcy trustee has not prepared an
       amendment to Focus Media’s S corporation
       return. The accountant for taxpayer has
       prepared a pro forma amended Form 1120S,
10               RUBIN V. UNITED STATES

       U.S. Income Tax Return for an S corporation,
       for Focus Media’s calendar year 2000 and
       contends that the reporting positions
       contained in the amended return are accurate.
       Accordingly, the aggregate losses being
       claimed as deductions by taxpayer in this
       return are those which would be reflected on
       an amended S corporation return if it had
       been filed.

       As promised by the statement, Rubin’s
       amended filing for 2000 included a Form
       1120S, “U.S. Income Tax Return for an S
       Corporation,” for Focus, filled in by Rubin’s
       accountant to reflect what Rubin contended
       that the Focus return should have reported,
       including adjustments described in the so-
       called “pro forma” return as based on
       uncollectable debts and exclusion of
       cancellation of indebtedness income.
       Rubin’s amended filing also included a
       revised Schedule K-1, “Shareholder’s Share
       of Income, Credits, Deductions, etc.,” listing
       what Rubin contended should have been
       reported by Focus to Rubin based on the
       figures in the pro forma return for Focus.

    Part II of the amended returns, Form 1040X, filed by
Rubin for both tax years 1998 and 1999 also said “see
attached statement.” For 1998 the attached statement
consisted of a one-page chart showing the effect of the net
operating loss carryback from 2000. For 1999 the attached
statement consisted of a one-page chart showing the effect
of the net operating loss carryover from 1998. Each of those
charts had the same three columns of figures as the 2000
                 RUBIN V. UNITED STATES                    11

chart, showing the amounts originally reported, the net
change, and the amount as reported in the amended return.
Copies of the pro forma Schedule K-1 for 2000 were also
included in the amended returns for 1998 and 1999.

    The Government does not contend that it was unable to
understand the revisions proposed by Rubin in his amended
returns. When the IRS initially disallowed Rubin’s refund
claims, it did not do so on the grounds that he failed to
comply with section 6037. The IRS instead provided five
reasons for disallowing Rubin’s claims, all of which were
based on substantive disagreements and the Government’s
determination that the claims lacked merit. To make that
determination the IRS necessarily identified the items that
were treated differently by Rubin than had been treated in
the return filed by the bankruptcy trustee for Focus. It then
evaluated Rubin’s claims as to those items, and rejected
them for substantive reasons.

     At oral argument, the Government acknowledged that
Rubin’s filings permitted the IRS to perceive the
inconsistencies between the return actually filed on behalf of
Focus and the pro forma return prepared by Rubin’s
accountant. Observing these inconsistencies, the IRS likely
compared Rubin’s pro forma return and Focus’s return on a
line-by-line basis. In practical terms, then, the amended
filings by Rubin succeeded in identifying the inconsistencies
with the previously filed returns sufficiently for the
Government to understand them and to reject them on the
merits. That supports Rubin’s argument that his filings were
sufficient to meet section 6037(c)(2)’s requirement for “a
statement identifying the inconsistency.”

    The Government argues that Rubin’s returns did not
identify the right inconsistencies, however. It complains that
“Rubin only identified how his amended returns were
12                   RUBIN V. UNITED STATES

different from his original returns – not how his amended
returns were different from the corporate returns.” In effect,
the Government appears to argue that the requirement would
have been satisfied had Rubin added a chart listing the
relevant figures reported on the Focus return with the pro
forma returns included in Rubin’s amended filings. Because
such a chart was not included, the Government contends that
Rubin’s amended returns should be rejected, even though the
Government necessarily understood that Rubin’s claim
rested on the Focus return differences. We reject this logic.
Section 6037 does not exalt form over substance in that
manner.

    Any doubt on that score is confirmed by Form 8082,
published by the Government for use in reporting
inconsistencies under these circumstances. 4 Form 8082,
“Notice of Inconsistent Treatment or Administrative
Adjustment Request,” identified for use by S corporations,
asks the taxpayer to describe inconsistent items and to
indicate for each item whether the inconsistency pertains to
the amount of the item or how it was treated on the original
return. It then asks the taxpayer to list: “(c) Amount as
shown on Schedule K-1, Schedule Q, or similar statement, a
foreign trust statement, or your return, whichever applies,
(d) Amount you are reporting, and (e) Difference between
(c) and (d).” I.R.S. Form 8082 (Sept. 2017) (emphasis
added). Entry (c) is relevant here as it identifies what should
be, explicitly, included from the taxpayer’s previous return.

     4
      The Government argued to the district court that Rubin’s amended
returns should be rejected because he failed to file Form 8082 to identify
the inconsistent treatment in his return. The district court discussed that
contention in its order but did not rest its decision on that basis. The
Government did not make that argument in its brief. The Government
confirmed at oral argument that it had abandoned the argument, so we
do not consider it.
                  RUBIN V. UNITED STATES                     13

That is what Rubin provided. There is nothing in Form 8082
that directs or requires the taxpayer to report figures taken
directly from the corporation’s return.

    The Government argues that requiring it to compare the
filed Focus return with the pro forma return submitted by
Rubin would have been unduly burdensome for the IRS. It
points out that Rubin’s pro forma filing for Focus spanned
more than 20 pages. It is true that the entire pro forma
document that Rubin filed (including both the pro forma tax
return and the pro forma Schedule K-1) was twenty-two
pages long. That fact does not, however, impose such a
burden that the IRS could not reasonably accomplish its
duty, particularly, in light of the size of the claimed refund.
In fact, the IRS would be expected to review returns and that
is actually what it did. A two-page pro-forma Schedule K-1
accompanied by a two-page statement explaining the
inconsistencies entries does not impose an oppressive task
on the IRS even under Section 6037 standards.

    The Government elaborates on its argument contending
that Rubin’s interpretation of Section 6037 is unsound as a
matter of policy because it would “encourage shareholders
like him not to disclose the inconsistencies between their
returns and the corporate returns.” Rubin has not argued that
he was not required to identify the relevant inconsistencies,
however, and we do not so conclude. He contends that he
did in fact identify the inconsistencies sufficiently for the
IRS to understand and respond to them.

    The Government counters that this interpretation of
Section 6037 “would render the filing of an administrative
claim an exercise in futility” because the IRS would have to
defend against a refund action in court based on arguments
that “it was directed to disregard at the administrative level.”
There was nothing that the Government was directed to
14                 RUBIN V. UNITED STATES

disregard here. It dealt with Rubin’s amended returns on the
merits, and it was able to do so because Rubin’s return
included a statement that sufficiently identified the relevant
inconsistencies.

III.      Conclusion

     The judgment in favor of the Government regarding
Rubin’s refund claims for tax years 1998 through 2000,
based on his alleged failure to comply with section 6037, is
reversed. We conclude that his filings satisfied the
requirement that the shareholder of an S corporation whose
return includes entries that are inconsistent with the return
filed by the corporation must file “a statement identifying the
inconsistency.” 26 U.S.C. § 6037(c)(2)(A)(ii). The action
is remanded for further proceedings.

    Because Rubin has abandoned his appeal of his refund
claim for tax year 2001, the dismissal of that claim is
affirmed.

       Costs on appeal are awarded against the Government.

  AFFIRMED IN PART, REVERSED IN PART, and
REMANDED.