REBECCA F. DOHERTY, District Judge.
Currently pending before the Court is a motion for partial summary judgment [Doc. 21] filed by plaintiffs, Michel B. Moreno and Tiffany C. Moreno, and a motion for partial summary judgment [Doc. 22] filed by defendant, the United States of America. For the following reasons, the motion filed by plaintiffs [Doe. 21] is GRANTED IN PART, and the motion filed by defendant [Doc. 22] is DENIED.
This suit was brought by plaintiffs, Michel and Tiffany Moreno, to recover a refund for the alleged overpayment of federal income taxes for the year 2005.
By way of this suit, plaintiffs seek to recover federal income taxes of $667,299.00, plus interest thereon, for the tax year 2005 on the grounds that they are entitled to deduct the entire Aerodynamic loss in 2005. [Doc. 22-2, p.12, ¶ 28; Doc. 29-1, p.4, ¶ 28] By way of their respective motions, plaintiffs seek a ruling they were "at risk within the meaning of 26 U.S.C. § 465 with respect to the aircraft leasing activity in which Aerodynamic, LLC engaged during 2005," and "[t]hat the leasing activity of Aerodynamic, LLC in 2005 was not a rental activity by reason of the exception set forth in 26 C.F.R. § 1.469-1T(e)(3)(ii)(A) because the average period of customer use of Aerodynamic's aircraft was less than 7 days" [Doc. 21, p.1]; defendant seeks a ruling that plaintiffs were not at risk pursuant to 26 U.S.C. § 465 with respect to the aircraft leasing activity, and that the aircraft leasing activity constituted a rental activity, subject to the passive activity loss rules found at 26 U.S.C. § 469.
"A party may move for summary judgment, identifying each claim or defense—or the part of each claim or defense—on which summary judgment is sought." Fed. R. Civ. P. 56(a). "The court shall grant summary judgment if 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." Id.
Id. at § (c)(1).
Id. at § (e).
As summarized by the Fifth Circuit in Lindsey v. Sears Roebuck and Co., 16 F.3d 616, 618 (5
The Supreme Court has instructed:
Lujan v. National Wildlife Federation, 497 U.S. 871, 884 (1990)(quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). The Court later states:
Id. at 888-89 (1990)(internal quotations and citations omitted). The Fifth Circuit has further elaborated:
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5
Finally, in evaluating evidence to determine whether a factual dispute exists, "credibility determinations are not part of the summary judgment analysis." Id. To the contrary, in reviewing all the evidence, the court must disregard all evidence favorable to the moving party that the jury is not required to believe, and should give credence to the evidence favoring the nonmoving party, as well as that evidence supporting the moving party that is uncontradicted and unimpeached. Roberts v. Cardinal Servs., 266 F.3d 368, 373 (5
The Internal Revenue Code provides, generally, that a taxpayer may take a deduction from leasing depreciable property to the extent that he is "at risk" in the leasing activity. 26 U.S.C. § 465(a)(1), (c)(1)(C). Under the code, a taxpayer is considered "at risk for an activity with respect to . . . amounts borrowed with respect to such activity," provided the taxpayer "is personally liable for the repayment of such amounts." Id. at § 465(b)(1)(B), (b)(2)(A).
In this matter, plaintiff argues he was "at risk for the Aerodynamic activity of leasing the Aircraft, as Michel Moreno personally guaranteed the repayment of the loan from GE." [Doc. 21-2, p.11] "If the loan defaulted and the sale of the Aircraft was not sufficient to pay off the indebtedness, GE could pursue Mr. Moreno, Dynamic or both." [Id. at 13] The government agrees Moreno personally guaranteed the repayment of the GE loan to Aerodynamic, and thus satisfies section 465(b)(2)(A) ("a taxpayer shall be considered at risk with respect to amounts borrowed ... to the extent that he . . . is personally liable for the repayment of such amounts"). [Doc. 22-1, p. 7; Doc. 28, p. 12] However, the government argues "the substance and economic realities of the transaction" protected Moreno from ever being required to satisfy his obligation on Aerodynamic's note [Doc. 28, p.21], and therefore, the transaction falls within the exception from at risk treatment provided by section § 465(b)(4) ("a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements"). The government does not argue Moreno is "protected against loss [arising out of his personal guaranty] through nomecourse financing, guarantees, [or] stop loss agreements." 26 U.S.C. § 465 (b)(4). Thus, in order for the exception provided in section 465(b)(4) to apply, the Court must determine whether Moreno's personal guarantee ofthe Aerodynamic loan was "protected against loss through . . . other similar arrangements." Id.
The statute does not define or explain the phrase "other similar arrangements." The Second, Eighth, Ninth and Eleventh Circuits apply an "economic realities" test to determine whether a borrowed amount is protected against loss under § 465(b)(4). See e.g. Waters v. Commissioner, 978 F.2d 1310, 1316 (2
The "economic realities" test was originally set forth by the Ninth Circuit in American Principals Leasing Corporation, supra. According to that test, whether a taxpayer is personally liable for repayment ofborrowed amounts under § 465(b)(2) is determined by analyzing whether the taxpayer is ultimately liable for repayment of the borrowed amounts "in a worst-case scenario." Id. at 482. However, "whether the taxpayer has engaged in a loss-limiting arrangement prohibited by subsection 465(b)(4)" (and thus falls within the exception to "at risk" treatment) is determined by whether "a transaction is structured — by whatever method — to remove any realistic possibility that the taxpayer will suffer an economic loss if the transaction turns out to be unprofitable." Id. at 483. Under the economic realities test, "[a] theoretical possibility that the taxpayer will suffer an economic loss is insufficient to avoid the applicability of this subsection." Id. By contrast, the Sixth Circuit's "payor of last resort" test asks whether, under both sections 465(b)(2) and (b)(4), "in a worst case scenario, the individual taxpayer will suffer any personal, out-of-pocket expenses." Pledger v. U.S., 236 F.3d 315, 319 (6th cir. 2000) (citing Emershaw v. Commissioner, 949 F.2d 841, 848-51(6th Cir. 1991)).
As previously noted, plaintiff argues he was "at risk for the Aerodynamic activity of leasing the Aircraft, as Michel Moreno personally guaranteed the repayment of the loan from GE." [Doc. 21-2, p.11] "If the loan defaulted and the sale of the Aircraft was not sufficient to pay off the indebtedness, GE could pursue Mr. Moreno, Dynamic or both." [Id. at 13] Conversely, the government argues Moreno was not "at risk" with respect to his personal guaranty of the Aerodynamic loan, because Moreno engaged in a loss-limiting arrangement which effectively removed any realistic possibility that he would suffer an economic loss in the event Aerodynamic defaulted on its loan. [Doc. 28, p.10]
The Court agrees with the parties that in this matter, whether the economic realities or the payor of last resort test is employed, the result is the same. The Court further finds, pursuant to either test, plaintiff was "at risk" with respect to the Aerodynamic loan. Before delving into the specific arguments of the government however, the Court must note in every case cited by the government in support of its position that "the substance and economic realities of the transaction. . . effectively insulated Moreno from any realistic possibility of suffering an economic loss in connection with the GE loan," an important factor (and indeed, often the determinative factor) was the involvement of a complicated web of circular sale/leaseback transactions. Such an arrangement does not exist in this matter.
According to the United States Tax court, "We scrutinize the economic reality of leasing activities by focusing in particular upon: The relationships between the parties; whether the underlying debt is nonrecourse; the presence of offsetting payments and bookkeeping entries; the circularity of the transaction; and the presence of any payment guarantees or indemnities." Kimmich v. C.I.R. L 959618, 5-6 (U.S.Tax Ct.,1999). Here, the underlying debt is recourse, there are no offsetting payments and bookkeeping entries, no "circularity of the transactions," and there are no payment guaranties or applicable indemnity provisions. Rather, the only factor worth discussion is the relationship between the parties. Plaintiff was the sole owner of Aerodynamic (the borrower), and plaintiff owned 98% of Dynamic's parent company. However, no case has found this single factor removes "at risk" status.
Simply put, in this matter, the failure of Aerodynamic to meet the terms of its loan agreement would trigger a demand for payment by GE against Dynamic and/or Moreno. The government has alerted this Court to no arrangement that excuses performance under the note or protects against loss if the note payments are not made. Nevertheless, the Court will address the specific arguments asserted by the government. The government argues as follows:
The govermnent argues GE's internal loan documents show from the time GE made the loan in September 2005 until the end of December 2005, "Moreno's financial statements show that he did not have sufficient liquidity to pay the GE Loan if Aerodynamic had defaulted on the loan." [Doc. 22-1, pp. 9-10] The government asserts "[a]lthough Moreno's financial statements show that he had a net worth of approximately $27 million in September 2005, the bulk of his assets consisted of non-marketable securities, retirement savings, and a $500,000 deposit/downpayment on the aircraft that Dynamic Industries paid." [Id. at 10] According to the government, once the foregoing items are excluded, Moreno's "adjusted net worth as of September 2005 totaled $11,537.
According to plaintiff, "Defendant's argument ignores the economic reality that Moreno's personal financial statement referenced by the defendant reflected a net worth at the time of approximately 27 million dollars and that within fifteen (15) months of the close of 2005 the plaintiffs sold a 51% interest in Moreno Energy, Inc. and its affiliates for an amount in excess of 150 million dollars." [Doc. 30-2, pp. 7-8] Accordingly, "Moreno did indeed have the personal resources and independent means to cover his guaranty of the GE loan if Aerodynamic defaulted on the loan." [Id. at 8] Plaintiff further asserts, "The marketability of Moreno's closely held businesses in December of 2005 and Moreno's liquidity are disputed issues of fact." [Doc. 29, p.6] Plaintiff argues the government has cited no legal authority "that a guarantor must have unencumbered cash or marketable resources to satisfy a claim under a guaranty to be at risk." [Doc. 30-2, p. 7] Plaintiff notes had he been called upon to satisfy Aerodynamic's obligation, he could have borrowed the funds from a third-party lender "or from an entity owned by the plaintiffs . . . ." [Id.]
First, the Court agrees with plaintiff that his liquidity in 2005 is a question of fact
In support of this argument, the government asserts the following: in approving the loan to Aerodynamic, "GE Capital performed an extensive review and analysis of the financial condition of Dynamic Industries and Moreno, and concluded that `Dynamic [Industries] . . . is where most of the assets and income reside.'"
According to plaintiff, "GE's internal analysis of the financial strengths of the various guarantors is not really relevant to the issue," in light of the fact GE required, and was given, a personal guaranty by Moreno. [Doc. 29, p.6] Plaintiff further argues defendant's position that GE would have pursued Dynamic rather than Moreno in the event of Aerodynamic's default "fails to take into consideration that Moreno Energy, Inc. and Dynamic had significant debt to third-party lenders and that all of Dynamic's assets were pledged as security for its loans from its third-party lenders."
Again, the Court finds this is a question of fact, but not a question of material fact. Again, the government has cited no legal authority in support of its position that where a lender's internal loan documents purportedly show the lender is relying upon the financial strength of one surety over another surety, the latter surety is no longer to be given "at risk" treatment under section 465, because the foregoing scenario constitutes protection from loss under either the payor of last resort test or the economic reality test.
According to the government, "the undisputed facts also show that Moreno, as controlling shareholder of Moreno Energy, had the requisite ability to ensure that Dynamic Industries (and not Moreno) paid any loss that may result upon default of the loan by Aerodynamic, and that his personal assets would be protected from such loss." [Doc. 22-1 at 12; see also Doc. 28, p. 16] According to plaintiff, "if Dynamic funds were used to repay the GE loan it would create a debt from Moreno to Dynamic and/or its parent," and that "Fin such event Moreno would be the person that would suffer the ultimate economic loss," either by paying Aerodynamic's obligation through his personal finances, or by diminution of the value of his companies. [Doc. 29, p.6] Again, the Court finds this is a question of fact, but it is not material. Both Dynamic and Moreno were sureties on the Aerodynamic loan. If Aerodynamic were to default on the loan, the bank could call upon Dynamic, Moreno, or both to satisfy the obligation. Accordingly, the government's speculative assertion, which necessarily requires a resolution of disputed facts, is insufficient to show Moreno engaged in a prohibited loss-limiting arrangement.
The government argues, "the MES Agreement ensured that Moreno would be indemnified from any loss that may arise if Aerodynamic defaulted on the loan." [Doc. 22-1 at pp. 12-13] The "MES Agreement" to which the government refers is a document entitled, "Personal Service and Employment Agreement," entered into by Moreno and Moreno Energy Services, Inc. Specifically, the government cites this Court to the indemnity provision contained within the Personal Service and Employment Agreement [Id. at 13], which reads as follows:
Plaintiff responds, "A simple reading of the [indemnity] provision reveals that it does not afford Moreno any protection against a loss with respect to his guaranty of the GE loan." [Doc. 29, p. 8] Plaintiff contends the indemnity provision "is a standard indemnification agreement which offers protection to officers and directors of corporations in connection with the performance of their duties as directors, officers, employees, consultants or agents of the corporation or the corporation's subsidiaries, affiliates or other enterprises if serving in such capacity at the request of the corporation." [Id.] Plaintiff argues his personal guaranty to GE was not made in his capacity as "a director, officer, employee, consultant, or agent of Moreno Energy Services, Inc. or any of its subsidiaries, affiliates or any other enterprises where he was serving at the request of Moreno Energy Services, Inc.," but rather was provided at the request of GE in plaintiff's capacity "as the sole member of Aerodynamic, LLC." Accordingly, plaintiff contends the referenced indemnity provision does not provide plaintiff with a "cause of action against Moreno Energy Services, Inc. for indemnity to recover any amounts he might be called upon to pay under the guaranty of the GE loan to Aerodynamic under the IVIES Agreement." [Id. at 8-9]
The Court agrees the government has not shown the indemnity provision contained in Moreno's employment contract with Moreno Energy Services, Inc. is sufficiently broad in scope, such that it applies to Moreno's personal guaranty of the Aerodynamic loan. No evidence has been provided to this Court that the personal guaranty was executed in Moreno's capacity as a director, employee, agent, etc. of Moreno Energy Services, Inc. or its subsidiaries or affiliates, nor has any evidence been presented that Moreno executed the personal guaranty because he was serving in such a capacity "at the request of Moreno Energy Services, Inc.
In plaintiff's opening brief, he argues he is entitled to at risk treatment, because in the event either he or Dynamic satisfied the obligation on behalf of Aerodynamic, the paying surety would have a right of contribution against the non-paying surety for fifty percent of the amount paid, pursuant to La. Civ. Code arts. 3055 and 3056.
While the government acknowledges Dynamic "might have a right of contribution against Moreno, as a co-surety" for half of any amount Dynamic paid pursuant to La. Civ. Code arts. 3055 and 3056, the government again argues "any recovery realized therefrom would be offset in full by the indemnification claims that Moreno could assert pursuant to the provisions of the MES agreement." [Doc. 28, pp. 18-19] With regard to plaintiffs argument Dynamic would have a right of reimbursement against him for the remaining fifty percent (either contractually or pursuant to a theory of unjust enrichment), the government responds, "[i]t is doubtful that Dynamic Industries would have a valid reimbursement claim against Moreno because its execution of the corporate guaranty was for its benefit [i.e. use of the aircraft], as much as it was for Moreno's benefit," but "even if Dynamic Industries had a valid reimbursement claim, its recovery on that claim would be canceled by the indemnification claims that Moreno would assert pursuant to the MES indemnification provisions." [Id. at 19-20] The government further argues plaintiff would have no cause of action for unjust enrichment, because such a remedy "is not available if the law provides another remedy," and here, plaintiff argues "Dynamic Industries had various contractual rights to pursue recovery from Moreno (
Again, the Court finds the indemnity provision is inapplicable to the facts at hand, and thus does not constitute a prohibited loss-limiting arrangement. With respect to rights of contribution and reimbursement, where a member of a limited liability company guarantees a liability of the limited liability company, he or she is at risk, except to the extent he or she has a right of contribution or reimbursement from the other guarantors. See e.g. IRS Field Service Advisory 2000-25-018 (June 23, 2000), 2000 WL 33116072 (each member of a limited liability company "who has guaranteed a liability of the limited liability company is at-risk, except to the extent the member has a right of reimbursement against the remaining members"); IRS Chief Counsel Advisory 20130828 (February 22, 2013), 2013 WL 653295 ("an LLC member is at risk with respect to LLC debt guaranteed by the member (where the LLC is treated as either a partnership or a disregarded entity for federal tax purposes), but only to the extent that the member has no right of contribution or reimbursement from the other guarantors. . ."; taxpayer is not at risk "for those amounts" for which he has a right of contribution against co-sureties); Susan Kalinka, Limited Liability Companies and Partnerships: A Guide to Business and Tax Planning, 9A LACIVL § 6.7 (3d ed.) (2012)(a member of an LLC who guarantees an obligation of the LLC will assume personal liability for the LLC's obligation, and that member should be entitled to include in his or her at risk amount the portion of the guaranteed liability for which the member may not seek reimbursement); S. Rep. 94-938, 49, 1976 U.S.C.C.A.N. 3438, 3485 ("a taxpayer's capital is not `at risk' in the business . . . to the extent he is protected against economic loss of all or part of such capital by reason of an . . . arrangement for compensation or reimbursement to him of any loss which he may suffer"). Here, all parties acknowledge that if either Dynamic or Moreno were to pay Aerodynamic's obligation, the paying entity would have right of contribution against the other for half the amount it paid, pursuant to La. Civ. Code arts. 3055 and 3056. Under such circumstances, the IRS has determined a guarantor is at risk for fifty percent of the amount guaranteed.
With regard to plaintiff's assertion Dynamic would have a right of reimbursement or a claim of unjust enrichment against Moreno for the remaining fifty percent it paid on behalf of Aerodynamic, plaintiff has failed to cany his burden of proof, both legally and factually. First, plaintiff has provided this Court with nothing other than argument that "Dynamic would also have the right to proceed against Moreno for the remainder of the amount it paid as such amount would be accounted for and set up on the books of Dynamic or its parent [Moreno Energy Services, Inc.] as due from stockholder since the payment would be for the benefit of Aerodynamic, one of Mr. Moreno's wholly owned entities."
The issue for decision is whether the losses plaintiff incurred in his aircraft leasing business are subject to the passive activity loss rules set forth in 26 U.S.C. § 469. It is undisputed Aerodynamic entered into an agreement (entitled "Non-Exclusive Aircraft Lease Agreement") with six entities in 2005 to whom it later tendered the use of its aircraft, and all signatories to those agreements acknowledged Louisiana law would govern the agreement. For the reasons that follow, the Court holds the losses incurred by plaintiff are not subject to the passive activity loss rules.
Section 469 of the Internal Revenue Code generally disallows passive activity losses incurred by individual taxpayers for the taxable year.
26 C.F.R. § 1.469-1 T(e)(3)(i). However, as relevant herein, "an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year— (A) The average period of customer use for such property is seven days or less. . . ." Id. at § (e)(3)(ii)(A).
The "average period of customer use" is determined by dividing: (1) the aggregate number of days in all periods of customer use for the property (taking into account only periods that end during the taxable year or include the last day of the taxable year); by (2) the number of periods of customer use. 26 C.F.R. § 1.469-1(e)(3)(iii)(C). The regulations define "period of customer use," in pertinent part, as follows:
26 C.F.R. § 1.469-1(e)(3)(iii)(D).
At its core, the disagreement in this matter between the parties stems from the position each takes as to how to calculate the number of "periods of customer use." More specifically, the parties disagree as to that period of time "during which a customer ha[d] a continuous or recurring right to use" the aircraft. Plaintiff contends under the "Non-Exclusive Aircraft Leasing Agreement," each "period of customer use" is determined by each distinct period of time a lessee was in actual possession of the aircraft
Plaintiff supports his argument as follows:
The "Non-Exclusive Aircraft Lease Agreement" constitutes a contract of lease without a "definitive term."
The government supports its position as follows:
The "Non-Exclusive Aircraft Lease Agreement" constitutes a contract of lease, with "a definite term — the life of the aircraft — with a reservation of right to tenninate."
In this matter, the Court finds the agreements provide, in pertinent part, as follows:
There are three elements required to create a contract of lease under Louisiana law: "the thing, the price, and the consent." Acadiana Bank v. Foreman, 352 So.2d 674, 678 (La. 1977)(emphasis added); see also La. Civ. Code art. 2628. Louisiana law also recognizes "contracts to lease," to wit, "[a] contract to enter into a lease at a future time is enforceable by either party if there was agreement as to the thing to be leased and the rent, unless the parties understood that the contract would not be binding until reduced to writing or until its other terms were agreed upon." La. Civ. Code art. 2670 (emphasis added). In this matter, the parties contemplated a suspensive condition would be fulfilled prior to the existence of a binding contract for lease — namely, the potential lessee was required to submit a flight scheduling request for the owner's approval. [Doc. 21-3, p. 89, ¶ 3.2]
The term of the lease was indeterminate, in that it was dependent upon the will of the parties. La. Civ. Code art. 2678, id. at comment (e) ("A term is indeterminate if its terminal point is not fixed in advance but depends on the will of the parties subsequently expressed, such as a month-to-month lease or another periodical lease"); see also Becker &Associates, Inc. v. Lou-Ark Equipment Rentals, Inc., 331 So.2d 474, 476 (La. 1976). Because no time for the duration of the lease was agreed upon by the parties, its duration is supplied by law. La. Civ. Code art. 2680. The aircraft is a moveable, with its rent being fixed by the hour. Therefore, as a matter of law, the duration of the lease is hourby-hour. ki.
In light of the foregoing, plaintiffs' motion for partial summary judgment [Doc. 21] is GRANTED IN PART and DENIED IN PART. The motion is granted to the extent plaintiffs seek a ruling they were at risk with regard to the leasing activity of Aerodynamic, LLC, however, the Court finds plaintiffs were at risk only with respect to fifty percent of the Aerodynamic loan. The motion is additionally granted to the extent plaintiffs' seek a ruling that the leasing activity of Aerodynamic, LLC in 2005 was not a rental activity for purposes of the passive activity loss rules. The government's motion for partial summary judgment [Doc. 22] is DENI FAD.
26 U.S.C. § 465 (emphasis in original). Losses disallowed by this provision may be carried forward and deducted as losses in succeeding taxable years if the at risk rules become satisfied. 26 U.S.C. § 465(a)(2).
S. REP. 94-938, 49, 1976 U.S.C.C.A.N. 3438, 3484-85, 4029, n. 364 (footnotes omitted).
In American Principals, the Ninth Circuit, citing solely to footnote 364, supra, fmds that portion of the legislative history "shows that Congress intended to exclude the possibility that financial difficulty would prevent a guarantor from reimbursing a taxpayer for a loss from the subsection 465(b)(4) calculus," which, in turn, is evidence that the "worst-case scenario" is improper when determining whether a taxpayer has engaged in a loss-limiting arrangement. American Principals, 904 F.2d at 482. The Sixth Circuit however, relying upon all of the legislative history quoted above (save the first paragraph), disagreed with the Ninth Circuit, finding the legislative history indicates:
Emershaw, 949 F.2d at 849 (emphasis in original; citations omitted).
Relying solely upon the language of the statute and the cited legislative history, this Court tends to agree with the interpretation of the Sixth Circuit. However, for reasons that will be discussed, this Court need not adopt either test, as it fmds the result is the same regardless of the test employed.
5. Installment payments on both notes and leases that are equal and therefore offsetting
Thomas A. Pliskin, At Risk Determinations In Circular Leasing Transactions, CORPORATE BUSINESS TAXATION MONTHLY, August 2002, at 1.
Martuccio, 30 F.3d 743, 748 (6
[Doc. 24-2, p. 310, Ex. 58] From the foregoing, it is not clear to this Court whether GE Capital is stating "most of the assets and income reside" with Dynamic rather than Michel Moreno, or "most of the assets and income reside" with Dynamic rather than Moreno Energy, Inc.