United States District Court, District of Columbia
AUSTIN INVESTMENT FUND, LLC, by and through BRUCE ELIEFF, Plaintiff
UNITED STATES OF AMERICA, Defendant
COLLEEN KOLLAR-KOTELLY UNITED STATES DISTRICT JUDGE.
This case revolves around a portfolio of non-performing loans acquired from Chinese banking entities and related tax deductions and losses claimed by Austin Investment Fund, LLC, (“Austin”). Through a Notice of Final Partnership Adjustment (“F PA A ”), the Internal Revenue Service (“IRS”) notified Austin that it was disallowing various deductions and losses taken by Austin for tax years 2003 and 2004. Among other grounds for disallowing these deductions and losses, the IRS relied on section 482 of the Internal Revenue Code, which allows the IRS to adjust or reallocate income, deductions, and other tax items among entities commonly controlled or owned if that adjustment or allocation “is necessary in order to prevent evasion of taxes or clearly to reflect the income” of any such entities. 26 U.S.C. § 482. Plaintiff brought this action challenging the adjustments to the partnership items set out in the F PA A issued to Austin. Presently before this Court are Plaintiff Bruce Elieff’s  Motion for Partial Summary Judgment and Defendant’s / Cross-Motion for Partial Summary Judgment. Although Plaintiff’s challenge as a whole is not limited to the application of section 482, the motions before the Court are limited to the application of that provision of the Internal Revenue Code. Specifically, Plaintiff argues that the application of section 482 with respect to Austin for tax years 2003 and 2004 was unlawful. Defendant United States opposes Plaintiff’s motion for partial summary judgment and cross-moves for partial summary judgment in its favor regarding the application of section 482. Upon consideration of the pleadings,  the relevant legal authorities, and the record for purposes of this motion, the Court DENIES Plaintiff’s Motion for Partial Summary Judgment and GRANTS Defendant’s Cross-Motion for Partial Summary Judgment. The Court concludes that section 482 is applicable to the items at issue in this action and sustains the IRS’s disallowance of deductions and losses for 2003 and 2004 on the grounds of the application of section 482.
The Court includes a brief presentation of the basic facts underlying this case and reserves further presentation of the facts for the discussion of the cross-motions for partial summary judgment below.
In 1999, each of the four big commercial banks in the People’s Republic of China, including Bank of China, transferred its portfolio of non-performing loans to a separate “bad bank, ” called asset management companies. Pl.’s Statement of Material Facts in Support of Elieff’s Motion for Partial Summary Judgment (“Pl.’s Statement”), ECF No. 14, ¶ 10. Bank of China transferred its non-performing loan portfolio to the China Orient Asset Management Corporation (“China Orient”). Id. ¶ 10. Through the transactions between the commercial banks and the asset management companies, the Chinese government divided its banking system into “good banks, ” the big four state-owned commercial banks, and “bad banks, ” the four asset management companies. Id. ¶ 11.
Austin Investment Fund LLC was one of eight entities created to acquire an undivided interest in the Yuanjiang portfolio-a portfolio of non-performing loans-from China Orient. Id. ¶ 13. The Yuanjiang portfolio had a face value of approximately $217, 377, 027 when China Orient acquired the portfolio from Bank of China. See Id. ¶ 13 (citing Hahn Decl. ¶ 11); Decl. of Roy E. Hahn to Correct a Typing Error ¶ 3 (“The figure of $271, 337, 027 in Paragraph 11 should have been $217, 337, 027”); see also Def.’s Statement of Genuine Issues with Respect to Pl.’s Mot. for Partial Summary Judgment (“Def.’s Statement of Genuine Issues”), ECF No. 118, ¶ 6. As a result of a transaction orchestrated by Chenery Associates Incorporated and its owner Roy E. Hahn, Austin received a 23% percent share in the Yuanjiang portfolio. Pl.’s Statement ¶¶ 6, 19; see also Def.’s Statement of Genuine Issues ¶ 7. This transaction followed a valuation analysis by PricewaterhouseCoopers on behalf of Chenery regarding portfolios of Chinese non-performing loans. Id. ¶ 15. Subsequently, Austin’s share of the Yuanjiang portfolio was reduced from 23% to 19.24%. Id. ¶ 24.
The IRS issued a Notice of Final Partnership Administrative Adjustment (“F PA A ”) to Austin, dated December 15, 2014, with respect to tax years 2003 and 2004. Id. ¶ 28; Compl., Ex. A (Form 886-A). In the FPAA, the IRS proposed disallowing the entirety of Austin’s claimed losses and deductions for 2003 and 2004 attributable to the Yuanjiang portfolio-on the basis of the application of section 482, as well as on other grounds. Compl., Ex. A (Form 886-A), ¶ 9; Def.’s Statement of Material Facts in Support of Cross Motion for Partial Summary Judgment on Section 482 (“Def.’s Statement of Material Facts”), ECF No. 118, ¶ 42. Plaintiff brought this action, pursuant to 26 U.S.C. § 6226, challenging the proposed adjustments in the FPAA. The cross-motions now before Court concern only the application of section 482 as grounds for disallowing losses or deductions claimed by Austin for tax years 2003 and 2004.
II. LEGAL STANDARD
Summary judgment is appropriate where “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). The mere existence of some factual dispute is insufficient on its own to bar summary judgment; the dispute must pertain to a “material” fact. Id. Accordingly, “[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Nor may summary judgment be avoided based on just any disagreement as to the relevant facts; the dispute must be “genuine, ” meaning that there must be sufficient admissible evidence for a reasonable trier of fact to find for the non-movant. Id.
In order to establish that a fact is or cannot be genuinely disputed, a party must (a) cite to specific parts of the record - including deposition testimony, documentary evidence, affidavits or declarations, or other competent evidence - in support of its position, or (b) demonstrate that the materials relied upon by the opposing party do not actually establish the absence or presence of a genuine dispute. Fed.R.Civ.P. 56(c)(1). Conclusory assertions offered without any factual basis in the record cannot create a genuine dispute sufficient to survive summary judgment. See Ass’n of Flight Attendants-CWA, AFL-CIO v. Dep’t of Transp., 564 F.3d 462, 465-66 (D.C. Cir. 2009). Moreover, where “a party fails to properly support an assertion of fact or fails to properly address another party’s assertion of fact, ” the district court may “consider the fact undisputed for purposes of the motion.” Fed.R.Civ.P. 56(e).
When faced with a motion for summary judgment, the district court may not make credibility determinations or weigh the evidence; instead, the evidence must be analyzed in the light most favorable to the non-movant, with all justifiable inferences drawn in his favor. Liberty Lobby, 477 U.S. at 255. If material facts are genuinely in dispute, or undisputed facts are susceptible to divergent yet justifiable inferences, summary judgment is inappropriate. Moore v. Hartman, 571 F.3d 62, 66 (D.C. Cir. 2009). In the end, the district court’s task is to determine “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Liberty Lobby, 477 U.S. at 251-52. In this regard, the non-movant must “do more than simply show that there is some metaphysical doubt as to the material facts, ” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); “[i]f the evidence is merely colorable, or is not significantly probative, summary judgment may be granted.” Liberty Lobby, 477 U.S. at 249-50 (internal citations omitted).
Both Plaintiff’s Motion for Partial Summary Judgment and Defendant’s Cross-Motion for Partial Summary Judgment pertain to the application of section 482 of the Internal Revenue Code to Austin Investment Fund, LLC, for tax years 2003 and 2004. As explained above, in the Notice of Final Partnership Administrative Adjustment issued for Austin, the IRS disallowed certain claimed losses and deductions included on Austin’s tax return for tax years 2003 and 2004. Among other bases for disallowing those losses and deductions, the IRS relied on the application of section 482, which allows the IRS to re-allocate various items reported on tax returns, including income, deductions, and basis in assets. Each party seeks the entry of partial summary judgment with respect to the application of section 482. For the sake of clarity, the Court first addresses Plaintiff’s arguments for partial summary judgment and then addresses Defendant’s arguments for the entry for partial summary judgment in its favor.
A. Plaintiff’s Motion for Partial Summary Judgment
Plaintiff presents three arguments why partial summary judgment should be entered in its favor with respect to section 482. First, Plaintiff argues that the section 482 is inapplicable to the entities in question-Bank of China and China Orient-because they are not controlled by the Chinese government. Second, Plaintiff argues that the application of section 482 was arbitrary and capricious because of the IRS’s failure to explain the allocation and to provide any evidence for that allocation in the FPAA. And, third, Plaintiff argues that the act of state doctrine precludes the IRS from reallocating tax items with respect to the entities in question under section 482. The Court addresses, in turn, each argument.
1. Ownership and Control of Bank of China and China Orient
Under section 482, the IRS may reallocate income, deductions, or other tax items “[i]n any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests.” 26 U.S.C. § 482. Plaintiff argues that section 482 is inapplicable because Bank of China and China Orient were not commonly controlled. Plaintiff also suggests that the IRS may not apply section 482 with respect to Austin because Austin was not under common ownership or control with China Orient.
With respect to the relationship between Bank of China and China Orient, Plaintiff misunderstands the import of the statutory language, which allows the IRS to take action when “two or more organizations … [are] owned or controlled directly or indirectly by the same interests.” Id. § 482 (emphasis added). The statute does not require both ownership and control; it requires only one or the other. Sunshine Dep’t Stores, Inc. v. C.I.R., 42 T.C.M. (CCH) 1379 (T.C. 1981) aff’d sub nom. Sunshine Dep't Stores, Inc., v. Internal Revenue Serv., 705 F.2d 470 (11th Cir. 1983) (“[T]he relevant language of section 482 is phrased in the disjunctive: either common ownership or control, directly or indirectly, will suffice.”). While Plaintiff acknowledges the language of the statute, Plaintiff nonetheless argues only that there is no common control of Bank of China and China Orient. Indeed, Plaintiff acknowledges that those entities were both owned by the Chinese government. See Pl.’s Mot. at 6 (“[T]he Chinese government set up four Asset Management Companies (“AMCs”) to take on and resolve debt from each of the big four state-owned commercial banks, including: … The Bank of China”) (emphasis added); id. at 7 (“China Orient and the other three AMCs are all Chinese state-owned companies.”) (emphasis added). While the parties dispute whether or not Bank of China and China Orient were under common control, the Court need not address that issue because it is undisputed that they were under common ownership-which is sufficient to allow the application of section 482.
Plaintiff relies primarily on the decision of a district judge from the Northern District of Texas in Southgate Master Funds, LLC v. United States, 651 F.Supp.2d 596 (N.D. Tex. 2009), aff’d 659 F.3d 466 (5th Cir. 2011). Like this case, Southgate was a case pertaining to the acquisition of Chinese non-performing loans, in which a partnership, Southgate Master Funds, LLC, challenged the adjustment of partnership items through the FPAA that the IRS had issued to that entity. In Southgate, the district court upheld the IRS’s disallowance of the losses that Southgate had claimed on the ground that the Southgate partnership was a sham for tax purposes. Southgate, 659 F.3d at 478. But the district court disallowed the IRS’s imposition of penalties, reasoning that Southgate had established a complete defense to accuracy-related penalties. Id. In addition, the district court concluded that the IRS could not rely on section 482 to disallow Southgate’s losses because (1) the district court was not convinced that section 482 was applicable to “two wholly foreign organizations” and (2) it was “not apparent to the Court that Cinda [the asset management company] and CCB [the bank] were commonly controlled despite overarching state ownership.” Southgate, 651 F.Supp.2d at 663. Plaintiff argues that the Southgate court’s analysis of common control is applicable to the relationship between Bank of China and China Orient and, thus, is dispositive in this case. The Court disagrees.
As an initial matter, while Plaintiff emphasizes that the district court decision was affirmed on appeal by the Fifth Circuit-as it was-Plaintiff neglects to mention that the case was in fact affirmed on grounds unrelated to section 482. Indeed, the application of section of 482 was not even presented to the Fifth Circuit because plaintiff in that case appealed the disallowance of losses and the government appealed only the disallowance of the penalties; the government did not appeal the district court’s rulings with respect to section 482. See Southgate, 659 F.3d at 478; Def.’s Reply at 7. In any event, the language of the district court in Southgate is at most persuasive authority, and it may be properly considered dicta since the district court did not rely on the analysis in arriving at its conclusion that the losses in question were properly disallowed-on other grounds. The Court concludes that the plain language of the statute requires a contrary conclusion.
As stated above, section 482 allows the IRS to made adjustments in the following circumstances:
In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary ...