Opinion
No. 02-1075-T.
May 12, 2003.
ORDER
On February 24, 2003, Plaintiffs Todd's Discount Drugs, Inc., et al., filed a motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. Plaintiffs are seeking a tax refund in the amount $125,174.39 from Defendant for the tax period ending March 31, 1992.
Plaintiffs filed a timely tax return with the Internal Revenue Service (IRS) for the tax period ending March 31, 1992, and paid tax in the amount of $979.00. On April 20, 1998, the IRS assessed an income tax deficiency of $64,220 against Todd's Discount. The basis for this assessment was an audit determination that certain director's fees were not deductible by the taxpayer. On May 7,1998, Todd's Discount paid the deficiency, a penalty, and interest in a total amount of $125,174.39. On December 30, 1999, Plaintiffs filed an amended income tax return for the tax period ending March 31, 1992. The Plaintiffs asserted in the amended tax return that in 1992, the business was operating as a partnership. The tax deficiency calculated by the IRS was based upon Todd's Discount being taxed as a corporation. Plaintiffs filed this action seeking a refund of the deficiency payment. Plaintiffs assert that under the IRS regulations, they are a partnership and all tax liability should be calculated accordingly. Plaintiffs note that Todd's Discount was not incorporated in 1992. Todd's Discount became a corporation on January 14, 1993.
Defendant believes it properly assessed Todd's Discount's tax liability. Although Todd's Discount was not formally incorporated, Defendant asserts that it was acting as an association, which is taxed the same as a corporation. "The term `association' refers to an organization whose characteristics require it to be classified for purposes of taxation as a corporation rather than as another type of organization such as a partnership or a trust." Reg. § 301.7701-2. Additionally, Defendant raises the defense of equitable estoppel. Defendant argues that Plaintiffs should be estopped from arguing that it was a partnership based upon the duty of consistency. Plaintiffs have been in business since 1986. Prior to 1992 and subsequently, Todd's Discount has uniformly filed a tax return as a corporation. Accordingly, Defendant believes Plaintiffs are estopped from arguing that Todd's Discount was a partnership.
Federal Rule of Civil Procedure 12(c) permits a judgment on the pleadings. "In reviewing such a motion, the district court must accept all of the nonmoving party's well-pleaded factual averments as true and draw all reasonable inferences in [its] favor." Feliciano v. Rhode Island, 160 F.3d 780, 788 (1st Cir. 1998). The motion is granted when no material issue of fact exists and the party making the motion is entitled to judgment as a matter of law. Paskvan v. Cleveland Civil Service Comm'n, 946 F.2d 1233, 1235 (6th Cir. 1991). The Commissioners' determination of a tax deficiency is presumed to be correct and the taxpayer has the burden to show it to be otherwise. Davis v. Comm'r, 674 F.2d 553 (6th Cir. 1982) (citing Coomes v. C.I.R., 572 F.2d 554 (6th Cir.), cert. denied, 439 U.S. 854 (1978)).
The term "corporation" is defined in the Internal Revenue Code to include "associations, joint-stock companies, and insurance companies." I.R.C. § 7701(a)(3). The IRS assessed Todd's Discount tax deficiency as an "association." An interplay of local law and federal law determines the type of entity for the purposes of taxation. See Reg. § 301.7701-1(b) ("The Internal Revenue Code prescribes certain categories, or classes, into which various organizations fall for the purposes of taxation.") and (c) ("Although it is the Internal Revenue Code rather than local law which establishes the tests or standards which will be applied in determining the classification in which an organization belongs, local law governs in determining whether the legal relationships which have been established in the formation of an organization are such that the standards are met. Thus, it is local law which must be applied in determining such matters as the legal relationships of the members of the organization among themselves and with the public at large, and the interests of the members of the organization in its assets."). As stated above, Regulation 3301.7701-2(a) defines the term "association" as "an organization whose characteristics require it to be classified as a corporation for the purposes of taxation as a corporation rather than as another type of organization such as a partnership or trust." The Regulations then list six factors that must be analyzed. These are: (1) associates, (2) an objective to carry on a business and divide the gains therefrom, (3) continuity of life, (4) centralization of management, (5) liability for corporate debts limited to corporate property, and (6) free transferability of interests.See Reg. § 301.7701-2(a). The regulation then defines these terms and often refers to the Uniform Partnership Act (UPA).
Plaintiffs assert that they are a partnership, subject to the UPA. Because they are subject to the UPA, Plaintiffs' argue that Regulation § 301.7701-2 supports their characterization of Todd's Discount as a partnership. In response, Defendant raises the defense of equitable estoppel. If Defendant prevails upon this assertion, Plaintiffs would be estopped from arguing it was a partnership.
Because this is a motion for judgment on the pleadings under Rule 12(c), the Court does not look to outside evidence to support the assertions of the parties. Plaintiffs devote a substantial portion of their brief addressing the factors listed in § 301.7701-2. However, the entire discussion assumes Todd's Discount was a partnership subject to the UPA. The issue of whether Todd's Discount was operated as a partnership in 1992 is very fact specific. The interplay between federal and local law, specifically when addressing the definitions in Reg. § 301.7701-2, indicates that mere labeling does not conclude the issues presented. Often, issues of taxation, such as one presented in this case, involve substance over form. The IRS regulations contemplate a scenario where an entity is a "partnership" under state law, but taxable as an "corporation" under the I.R.C. This case further presents fact specific issues because the Defendant raises the defense of equitable estoppel. Whether Defendant can prevail upon this claim is contingent upon unresolved factual issues presented at this stage of the litigation.
In short, Plaintiff has not established that no issues of material facts exist. Furthermore, the pleadings do not set forth facts that would negate Defendant's affirmative defense of equitable estoppel. Many questions of fact exist regarding the relationships of the principle interest holders, the distribution of profits, sharing of liabilities, and choice of entity for the purposes of taxation before and after the 1992 taxable year. Plaintiffs and Defendant can raise similar arguments in later proceedings and present evidence to support the assertions addressed in the motion for judgment on the pleadings. Because material issues of fact exist and the Plaintiffs have failed to establish they are entitled to judgment as a matter of law, the motion for judgment on the pleadings is DENIED. Paskvan v. Cleveland Civil Service Comm'n, 946 F.2d 1233, 1235 (6th Cir. 1991).
IT IS SO ORDERED.