United States v. Robbins, 2007 U.S. App. LEXIS 7539 (10th Cir. 2007).
2007 U.S. App. LEXIS 7539,*
UNITED STATES OF AMERICA, Plaintiff-Appellee, v. LEE E. ROBBINS, Defendant-Appellant.
No. 06-5014
UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT
2007 U.S. App. LEXIS 7539
March 30, 2007, Filed
NOTICE: [*1] RULES OF THE TENTH CIRCUIT COURT OF APPEALS MAY LIMIT CITATION TO UNPUBLISHED OPINIONS. PLEASE REFER TO THE RULES OF THE UNITED STATES COURT OF APPEALS FOR THIS CIRCUIT.
PRIOR HISTORY: (D.C. No. 04-CR-104-01-K). (N.D. Okla.).
DISPOSITION: AFFIRMED.
COUNSEL: For UNITED STATES OF AMERICA, Plaintiff-Appellee: David E. O’Meilia, U.S. Attorney, Kevin C. Leitch, Kevin C. Danielson, Melody Noble Nelson, Asst. U.S. Attorney, Office of the United States Attorney, Tulsa, OK; Philip E. Pinnell, Asst. U.S. Attorney, Office of the United States Attorney, Tulsa, OK.
For LEE E. ROBBINS, Defendant-Appellant: Art Fleak, Tulsa, OK.
JUDGES: Before LUCERO, McKAY, and GORSUCH, Circuit Judges.
OPINION BY: Monroe G. McKay
OPINION: ORDER AND JUDGMENT *
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* After examining the briefs and appellate record, this panel has determined unanimously to grant the parties’ request for a decision on the briefs without oral argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore ordered submitted without oral argument. This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. It may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
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Appellant Lee E. Robbins was convicted by a jury of fifteen counts of tax fraud. In this direct criminal appeal, Mr. Robbins challenges the district court’s denial of his motion for severance, the adequacy of the verdict form, the calculation of tax loss for sentencing purposes, and the imposition of costs of prosecution.
I.
Robbins & Associates (R&A) was a bookkeeping and tax return preparation business which helped clients minimize their tax payments and maximize their refunds by falsely characterizing nondeductible personal expenses as deductible business expenses. Mr. Robbins, the principal of R&A, recruited, hired, and trained his co-defendant Gabriel Bonner for work in R&A’s office in Tulsa, Oklahoma. After Mr. Robbins moved to Georgia and opened an Atlanta office, he left Mr. Bonner in charge of the Tulsa office. Mr. Robbins continued to review Mr. Bonner’s work and he e-filed the returns prepared at both offices.
The government charged Mr. Robbins and Mr. Bonner with conspiracy to defraud the IRS, Mr. Robbins with 15 counts of aiding and assisting the preparation and submission of false and fraudulent tax returns in violation of 26 U.S.C. § 7206(2) [*3] , and Mr. Bonner with 50 different counts of the same crime. Before trial, Mr. Robbins moved for separate trials, arguing that he would be prejudiced by being tried with Mr. Bonner. The district court denied the motion and the parties proceeded to their joint trial.
At the close of evidence, Mr. Robbins renewed his motion for severance and the district court again denied it. The jury reached a verdict acquitting Mr. Bonner on all counts and finding Mr. Robbins not guilty of conspiracy but guilty of the 15 individual counts. The district court denied Mr. Robbins’ motion for a new trial and sentenced him to a total of 41 months’ imprisonment, based on a tax loss of over $ 400,000. It also ordered him to pay the costs of prosecution in the amount of $ 11,430.66, as provided by § 7206.
II.
On appeal, Mr. Robbins first asserts that the district court erred in denying his motion for a severance because his defense was antagonistic to that of Mr. Bonner. A motion for severance based on conflicting defenses triggers “a three-step inquiry” on the part of the trial court. United States v. Pursley, 474 F.3d 757, 765 (10th Cir. 2007). The first step requires a determination [*4] of “whether the defenses presented are so antagonistic that they are mutually exclusive,” so that “the acceptance of one party’s defense would tend to preclude the acquittal of the other, or that the guilt of one defendant tends to establish the innocence of the other.” Id. (quotations omitted). Next, “because mutually antagonistic defenses are not prejudicial per se, a defendant must further show a serious risk that a joint trial would compromise a specific trial right or prevent the jury from making a reliable judgment about guilt or innocence.” Id. (quotations and alterations omitted). “[I]f the first two factors are met, the trial court exercises its discretion and weighs the prejudice to a particular defendant caused by joinder against the obviously important considerations of economy and expedition in judicial administration.” Id. (quotations and alterations omitted). “Where the trial court ultimately denies severance,” this court will reverse the decision “only where the defendant has demonstrated an abuse of discretion.” Id.
At trial, Mr. Robbins and Mr. Bonner each attempted to cast all blame for tax fraud on the other. Mr. Robbins illustrates the antagonistic [*5] nature of their defenses by pointing out that Mr. Bonner testified that it was Mr. Robbins who “caused all the wrong and illegal tax returns to be filed.” Aplt. Br. at 21. And, according to Mr. Robbins, “Bonner’s counsel sought to deliberately undermine Robbins’ defense at trial with every witness so that Bonner appeared only to be someone who was a data clerk.” Id. at 10. Mr. Robbins also complains that Mr. Bonner’s counsel acted as an “additional prosecutor” by identifying himself as a former prosecutor and telling the jury to disbelieve the arguments made by Mr. Robbins’ attorney. Id. at 15.
Mr. Robbins has shown that he and Mr. Bonner presented defenses which “were sufficiently exclusive and antagonistic.” Pursley, 474 F.3d at 765. Nevertheless, he has not established the specific prejudice required at the second analytic step. “[D]efendants are not entitled to severance merely because they may have a better chance of acquittal in separate trials.” Id. at 766 (quotation and alteration omitted). “Despite their differing theories of defense, nothing prevented [Mr. Robbins] from presenting evidence [or argument] to support his theory [*6] even if it was inconsistent with [Mr. Bonner’s] defense.” Id.
Because Mr. Robbins did not demonstrate the requisite prejudice, there is no need “to explicitly engage in the third step of our inquiry-weighing prejudice to the defendant against considerations of judicial economy.” Id. at 767. On this record, the district court’s denial of the motion to sever does not amount to an abuse of discretion.
III.
Mr. Robbins next argues that he is entitled to a new trial because the jury verdict form was “irregular” and “bogus.” Aplt. Br. at 7, 31. We review the propriety of verdict forms under an abuse of discretion standard. United States v. Stiger, 413 F.3d 1185, 1190 (10th Cir. 2005). Applying that standard, we will reverse only if we have “substantial doubt that the jury was fairly guided.” United States v. Smith, 13 F.3d 1421, 1424 (10th Cir. 1994) (quotation omitted). Moreover, because there was no objection at trial, we review only for plain error, which is “error that affects the defendant’s right to a fair and impartial trial.” Id.
Mr. Robbins argues that the only possible explanation for the jury’s acquittal of Mr. [*7] Bonner and conviction of Mr. Robbins is confusion attributable to the verdict form. Aplt. Br. at 27. The verdict form submitted to the jury was a table with columns providing the date of each charged offense, the name of the filing taxpayer, and a place for the jury foreperson to circle either “guilty” or “not guilty.” R., Vol. I, Doc. 72. In his closing argument, Mr. Robbins’ attorney advised the jurors that the table “mirrors the one in the indictment and it has on there the years and so forth. . . . If you correlate the exhibits with the chart, you should be able to make your decisions on these individual counts.” Id., Sup’l Vol. II, at 35.
On appeal, however, Mr. Robbins claims the form is flawed for failure to “set out details of each count.” Aplt. Br. at 7. We have previously held that “[t]he purpose of the verdict form is not to repeat the elements of the offense. The language on the form serves only to identify where the jury should indicate its verdict on each count. . . . The fact that the question on the verdict form does not contain the language the instructions contain is immaterial.” United States v. Overholt, 307 F.3d 1231, 1248 (10th Cir. 2002). [*8] The form submitted to the Robbins/Bonner jury fulfilled its intended purpose. As a consequence, we see no error in connection with the jury verdict form.
IV.
Mr. Robbins asserts that the district court erred in calculating the tax-loss amount attributable to his crimes, a determination which affects his sentence under the advisory Federal Sentencing Guidelines. See U.S.S.G. § 2T1.1. On guideline issues, we review legal questions de novo, factual findings for clear error, and give due deference to the district court’s application of the guidelines to the facts. United States v. Wolfe, 435 F.3d 1289, 1295 (10th Cir. 2006).
In determining the total tax loss, “all conduct violating the tax laws should be considered as part of the same course of conduct or common scheme or plan unless the evidence demonstrates that the conduct is clearly unrelated.” U.S.S.G. § 2T1.1, cmt. n.2. See also United States v. Hayes, 322 F.3d 792, 801-02 (4th Cir. 2003) (holding that tax loss may include amounts in returns prepared by the defendant but not included in the indictment). The tax loss proved at [*9] trial amounted to $ 376,000. At the sentencing hearing, the government produced two tax-filer witnesses, whose false returns were not included in the indictment, and an IRS agent. Partially crediting the witnesses’ testimony, the district court found that Mr. Robbins was responsible for an additional loss in the amount of $ 90,675. Under the guidelines, this additional amount increased Mr. Robbins’ base offense level by two points. See U.S.S.G. §§ 2T1.1(a), 2T4.1 (Tax Table).
Mr. Robbins asserts that the trial court improperly based the tax-loss amount on surprise testimony relating to returns not listed in the indictment and not considered by the jury. As for the alleged “surprise” aspect of the testimony, we note that defense counsel objected to the appearance of the witnesses, but did not ask for a recess or continuance to develop rebuttal evidence. See R., Vol. XII at 4. And after the district court overruled the objection, Mr. Robbins’ counsel thoroughly cross-examined the witnesses. Thus, there is no indication that the government used an element of surprise to present misinformation to the court. Cf. [*10] United States v. Sunrhodes, 831 F.2d 1537, 1542 (10th Cir. 1987) (”Due process insures that a defendant will not be sentenced on the basis of ‘misinformation of a constitutional magnitude.’”) (citation omitted).
An equally unavailing contention is that the teachings of United States v. Booker, 543 U.S. 220, 125 S. Ct. 738, 160 L. Ed. 2d 621 (2005) prohibit the inclusion of tax loss arising from uncharged conduct that was not proven beyond a reasonable doubt. It is now well-settled that Booker does not preclude “judicial fact-finding by a preponderance of the evidence standard” at the sentencing stage unless the factual findings “operate[] to increase a defendant’s sentence mandatorily.” United States v. Hall 473 F.3d 1295, 1312 (10th Cir. 2007). Here, the district court explicitly “recognize[d] that the guidelines are advisory and not mandatory.” R., Vol. XII at 78. The district court committed no clear error in determining that Mr. Robbins caused a tax loss in excess of $ 400,000 and sentencing him based on that amount.
V.
Mr. Robbins’ final issue is his claim that the district court committed error in ordering him to pay $ 11,430.66 as [*11] the costs of prosecution without hearing evidence to justify the assessed amount. The imposition of the costs of prosecution is mandatory under the controlling statute, which provides that a person convicted of filing a false tax return “shall be fined not more than $ 100,000 . . ., or imprisoned not more than 3 years, or both, together with the costs of prosecution.” 26 U.S.C. § 7206 (emphasis added).
The presentence report (PSR) was the source of the assessed amount. In his written response to the PSR, Mr. Robbins objected generally to the imposition of the costs of prosecution, but made no objection to the proposed amount. Outside of the Booker context, a court may rely “on . . . unobjected-to facts for . . . sentencing purposes.” United States v. Wolfe, 435 F.3d 1289, 1299 (10th Cir. 2006).
This practice is consistent with Fed. R. Crim. P. 32(i)(3)(A), which obliges a defendant “to point out factual inaccuracies included in the PSR. And requiring a defendant to challenge any factual inaccuracies in the PSR before or during sentencing permits the district court to address those objections [*12] at a time and place when the district court is able to resolve those challenges.” Id.
Moreover, Mr. Robbins was given a second opportunity to make an appropriate objection. At the sentencing hearing, the district court made findings of fact, including a determination that costs of prosecution amounted to $ 11,430.66. It then specifically asked if there were “[a]ny objections to the Court’s findings of fact that haven’t already been discussed.” R., Vol. XII at 69. Mr. Robbins’ counsel responded that he had no further objections.
Contrary to Mr. Robbins’ contentions, an objection to the imposition of prosecution costs is analytically distinct from an objection to the calculation of the amount of those costs. Because Mr. Robbins did not make a proper objection at the appropriate time, we review the costs issue for plain error. United States v. Traxler, 477 F.3d 1243, 2007 WL 614266, *6 (10th Cir. 2007). And we find no such error in the district court’s adoption of the amount of prosecution costs proposed in the PSR.
The judgment of the district court is AFFIRMED.
Entered for the Court
Monroe G. McKay
Circuit Judge
Private Letter Ruling 132947-06 (2007).
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 200713002
Release Date: 3/30/2007
Index Number: 3402.15-00
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact: ———————, ID No. —————
Telephone Number: ———————
Refer Reply To: CC:PA:APJP:B01 PLR-132947-06
Date: December 21, 2006
Section 3402 – Income Tax Collected at Source
Section 3402.15-00 – Withholding on Gambling Winnings
LEGEND:
State Lottery = —————————————
$X = —
Dear —————————————:
This is in response to State Lottery’s request dated June 28, 2006, in which it requested a ruling under I.R.C. § 3402(q). Specifically, State Lottery requests a ruling that if a player purchases one lottery ticket for an online game, and that ticket has more than one panel for the same lottery drawing, then all winning panels for the same lottery draw from the single lottery ticket are treated as “Identical Wagers.”
FACTS
A player of an online State Lottery Game may purchase one ticket with up to ten different panels for the same draw date. The player selects six numbers on a panel. Each panel on the single ticket represents a separate “play” for that lottery draw date. Each play costs $X. A player may play the same numbers for more than one draw. A player may have multiple winning panels from the same lottery draw on a single lottery ticket.
LAW AND ANALYSIS
Section 3402(q)(1) of the Internal Revenue Code provides the general rule that every person, including the Government of the United States, a State, or a political subdivision thereof, or any instrumentalities of the foregoing, making any payment of winnings which are subject to withholding shall deduct and withhold from such payment a tax in an amount equal to 25 percent of such payment.
Section 3402(q)(3)(B) of the Code provides that for purposes of section 3402(q), the term “winnings which are subject to withholding” means proceeds of more than $5,000 from a wager placed in a lottery conducted by an agency of a State acting under authority of State law, but only if such wager is placed with the State agency conducting such lottery, or with its authorized employees or agents.
Section 31.3402(q)-1(c)(1) of the Employment Tax Regulations provides definitions and special rules for determining the amount of proceeds from a wager. Section 31.3402(q)-1(c)(1)(ii) provides, in part, that for
Amounts paid after December 31, 1983, with respect to identical wagers are treated as paid with respect to a single wager for purposes of calculating the amount of proceeds from a wager. For example, amounts paid on two bets placed in a parimutuel pool on a particular horse to win a particular race are treated as paid with respect to the same wager. However, those two bets would not be identical were one “to win” and the other “to place”, or if the bets were placed in different parimutuel pools, e.g., a pool conducted by the racetrack and a separate pool conducted by an off-track betting establishment in which the wagers are not pooled with those placed at the track. Tickets purchased in a lottery generally are not identical wagers, because the designation of each ticket as a winner generally would not be based on the occurrence of the same event, e.g., the drawing of a particular number. . . .
The identical wager provisions in Section 31.3402(q)-1(c)(1)(ii) were adopted pursuant to Treasury Decision 7919, 48 F.R. 46296, 1983-2 C.B. 213. The preamble to T.D. 7919 explains the rule, in part, as follows:
Under § 31.3402(q)-1…. Identical bets are those in which winning depends on the occurrence (or non-occurrence) of the same event or events. For example, two wagers on a horse to win a particular race generally are identical. … [But] … wagers containing different elements, e.g., and “exacta” and a “trifecta,” are not identical.
Although multiple winning panels are based on the occurrence of a single lottery draw, just as trifecta and exacta winning tickets are based on a single horse race, the wagers on each panel of a single ticket are not identical unless the player selects the same six numbers on the multiple panels. That is, assuming the numbers are not the same, the panels contain different elements and thus constitute multiple wagers. Because the wagers are not identical, the winning amounts do not need to be aggregated under the identical wagers provisions of I.R.C. § 3402(q) and Treas. Reg. § 31.3402(q)-1(c)(1)(ii).
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
Sincerely,
Carol Nachman
Acting Senior Technician Reviewer
Administrative Provisions and Judicial Practice
(Procedure & Administration)
cc: Federal, State & Local Governments Group Manager
Prebola v. Commissioner, 2007 U.S. App. LEXIS 7071 (2nd Cir. 2007).
2007 U.S. App. LEXIS 7071,*
SHIRLEY B. PREBOLA, N.K.A. SHIRLEY D. BEGY, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Docket No. 05-6953-ag
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
2007 U.S. App. LEXIS 7071
March 8, 2007, Submitted
March 27, 2007, Decided
PRIOR HISTORY: [*1] Appeal from a decision of the United States Tax Court (Cohen, J.) holding that a lump-sum payment received in exchange for the right to receive future annual lottery payments is ordinary income and not capital gain. Prebola v. Comm’r, T.C. Memo 2005-261, 2005 Tax Ct. Memo LEXIS 260 (T.C., 2005)
DISPOSITION: Affirmed.
COUNSEL: GERALD W. DIBBLE, Dibble, Miller & Burger, P.C., Rochester, NY, for Petitioner-Appellant.
RICHARD FARBER and REGINA S. MORIARTY, Attorneys, Tax Division, United States Department of Justice (Eileen J. O’Connor, Assistant Attorney General, on the brief), Washington, DC, for Respondent-Appellee.
JUDGES: Before: MESKILL, WINTER, and STRAUB, Circuit Judges.
OPINION: Per curiam:
The issue in this case is whether lump-sum proceeds received from a sale of future interest in lottery payments should be characterized for income tax purposes as a capital gain or as ordinary income. The United States Courts of Appeals for the Third, Ninth, and Tenth Circuits, along with the United States Tax Court in numerous rulings, have all held that such proceeds are properly characterized as ordinary income. See Lattera v. C.I.R., 437 F.3d 399 (3d Cir. 2006); United States v. Maginnis, 356 F.3d 1179 (9th Cir. 2004); Watkins v. C.I.R., 447 F.3d 1269, 1271 (10th Cir. 2006); [*2] see, e.g., Womack v. C.I.R., T.C. Memo 2006-240 (Nov. 7, 2006); Simpson v. C.I.R., T.C. Memo 2003-155, 85 T.C.M. (CCH) 1421 (2003); Davis v. Comm’r, 119 T.C. 1, 2002 WL 1446631 (2002). We have no difficulty reaching the same conclusion.
Petitioner Shirley D. Begy won $ 17.5 million in the New York State Lottery in 1997, payable in 26 annual installments. After receiving her first three installment payments — which she reported on her income tax returns as ordinary income — Begy sold her interest in the remaining payments to a third party for a lump sum of $ 7.1 million. On her 2000 income tax return, Begy reported the $ 7.1 million as a long-term capital gain. The Internal Revenue Service disagreed with this treatment and issued a notice of deficiency for $ 1.31 million on the ground that the proceeds from the sale should have been reported as ordinary income. The Tax Court agreed with the I.R.S.’s position. See Prebola v. Comm’r, 90 T.C.M. (CCH) 485, 2005 WL 3068344 (T.C. Nov. 8, 2005).
The Tax Court reasoned that the asset Begy sold — the right to future lottery installment payments — did not constitute a “capital asset” [*3] within the meaning of Section 1221 of the Internal Revenue Code. See id. at [WL] *2. We agree. Although the tax code defines “capital asset” broadly as “property held by the taxpayer,” I.R.C. § 1221(a), the Supreme Court has limited the scope of this provision in contexts, such as here, where the “property” at issue is a right to receive ordinary income payments in the future. See, e.g., Commissioner v. P. G. Lake, Inc., 356 U.S. 260, 266, 78 S. Ct. 691, 2 L. Ed. 2d 743 (1958) (holding that capital gains treatment was inappropriate where “[t]he substance of what was assigned was the right to receive future income” and the “substance of what was received was the present value of income which the recipient would otherwise obtain in the future”).
Under what has become known as the “substitute-for-ordinary-income doctrine,” the Supreme Court and the courts of appeals have held that where lump-sum payments are received in exchange “for what would otherwise be received at a future time as ordinary income,” the payments should be treated as ordinary income, not capital gains. Id. at 265; see also United States v. Midland-Ross Corp., 381 U.S. 54, 57-58, 85 S. Ct. 1308, 14 L. Ed. 2d 214 (1965) [*4] (treating gain on sale of non-interest-bearing notes as equivalent of interest and thus as ordinary income); Hort v. Commissioner, 313 U.S. 28, 31, 61 S. Ct. 757, 85 L. Ed. 1168 (1941) (lump sum paid for cancellation of rental payments owed under fifteen-year lease treated as ordinary income); C.I.R. v. Ferrer, 304 F.2d 125, 131, 134 (2d Cir. 1962) (right to receive percentage of film proceeds treated as ordinary income); Holt v. Commissioner, 303 F.2d 687, 690-91 (9th Cir. 1962) (lump sum received in exchange for future movie proceeds deemed ordinary income); Dyer v. Commissioner, 294 F.2d 123, 126 (10th Cir. 1961) (lump sum received for mineral leasehold payments held to be ordinary income); but see McAllister v. C.I.R., 157 F.2d 235 (2d Cir. 1946) (in a case decided before P. G. Lake, holding that a widow could treat as a capital gain the lump-sum payment she received when she was forced to sell her rights to future payments from a life estate in a trust).
As the Tenth Circuit noted, the “basic lesson” from this line of cases is that “when a party exchanges for a lump sum the right to receive in the future ordinary income already earned [*5] or obtained, the amount received serves as a substitute for the ordinary income the party had the right to receive over time. The lump sum is accordingly treated as ordinary income for taxation purposes.” Watkins, 447 F.3d at 1272. That is exactly what happened here: the $ 7.1 million Begy received was payment for a future stream of ordinary income that she had already earned the right to receive. Thus, just as her annual installments were treated as ordinary income, so should receiving a lump sum in exchange for the right to receive those installments. n1
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n1 Begy contends that her lump-sum payment should be treated as a capital gain because its value was determined, in part, by market forces outside of her control such as variable interest rates. By that logic, however, every right to a future income stream would have to be considered a capital asset because the market value of such rights are invariably dependent on the fluctuation of interest rates over time, thus rendering the substitute-for-ordinary-income doctrine a nullity.
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We recognize that there are contexts in which the substitute-for-ordinary-income doctrine does not or should not apply. See Maginnis, 356 F.3d at 1182 (”an approach that [takes] the doctrine too far . . . would hold that no sale of an asset that produces revenue, even common stock, could be taxed as a capital gain”); Lattera, 437 F.3d at 404 (”in theory, all capital assets are substitutes for ordinary income”); Thomas G. Sinclair, Comment, Limiting the Substitute-for-Ordinary-Income Doctrine: An Analysis Through Its Most Recent Application Involving the Sale of Future Lottery Rights, 56 S.C. L. Rev. 387, 421-22 (2004). But whatever the doctrine’s outer limits, this case falls squarely within them, as there is no question that Begy received her lump sum payment in exchange for the right to be paid income that had already been earned and that was, until the sale, being taxed as ordinary income. In other words, the $ 7.1 million is a clear substitute for the remainder of the $ 17.5 million in lottery payments she was to receive in the future.
Accordingly, we AFFIRM the decision of the Tax Court.
Barber v. Governor of the State of Colorado, 2007 Colo. App. LEXIS 480 (Colo. Ct. App. 2007).
2007 Colo. App. LEXIS 480,*
Douglas H. Barber; Heggem-Lundquist Paint Company, a Colorado corporation; and Rick Kerber, d/b/a Kerber’s Oil Company, Plaintiffs-Appellants, v. Bill Ritter, Jr., as Governor of the State of Colorado, and Cary Kennedy, as Treasurer of the State of Colorado, Defendants-Appellees.
Court of Appeals No. 05CA0752
COURT OF APPEALS OF COLORADO, DIVISION TWO
2007 Colo. App. LEXIS 480
March 22, 2007, Decided
NOTICE: [*1] THIS OPINION IS NOT THE FINAL VERSION AND IS SUBJECT TO REVISION UPON FINAL PUBLICATION
PRIOR HISTORY: City and County of Denver District Court. No. 04CV6602. Honorable R. Michael Mullins, Judge. Barber v. Owens, 2005 Colo. LEXIS 501 (Colo., May 23, 2005)
DISPOSITION: JUDGMENT AND ORDER AFFIRMED IN PART, REVERSED IN PART, AND CASE REMANDED WITH DIRECTIONS.
COUNSEL: Head & Associates, P.C., John F. Head, Denver, Colorado, for Plaintiffs-Appellants.
John W. Suthers, Attorney General , Maurice G. Knaizer, Deputy Attorney General, Monica Marquez, Assistant Attorney General, Denver, Colorado, for Defendants-Appellees.
Larry W. Berkowitz, Brad D. Bailey, Littleton, Colorado, Amici Curiae for City of Littleton.
JUDGES: Opinion by: JUDGE ROTHENBERG. Roy, J., concurs. Hawthorne, J., concurs in part and dissents in part.
OPINION BY: ROTHENBERG
OPINION: In this case involving the Taxpayer’s Bill of Rights (TABOR), Colo. Const. art. X, § 20, and Colo. Const. art. XI, §§ 3-4, plaintiffs, Douglas H. Barber, Rick Kerber, and Heggem-Lundquist Paint Company (collectively, the Taxpayers), appeal the trial court’s order dismissing their general claims and Heggem-Lundquist’s individual claims, and the summary judgment in favor of defendants, former Governor Bill Owens and former State Treasurer [*2] Mike Coffman (the state defendants). After the notice of appeal was filed, a notice of substitution was filed pursuant to C.A.R. 43(c)(1), reflecting that Bill Ritter, Jr. has succeeded Bill Owens as Governor and Cary Kennedy has succeeded Mike Coffman as Treasurer, and the caption was changed accordingly. We affirm in part, reverse in part, and remand with directions.
The primary issue here is this: May the legislature transfer to the general fund cash funds that were collected by the state and designated by statute for specific purposes, or do such transfers violate TABOR and Colo. Const. art. XI, §§ 3-4? With limited exceptions described below, we hold that the legislative acts at issue here which authorized such transfers do not violate TABOR or Colo. Const. art. XI, §§ 3-4.
I. Background
Between 2001 and 2004, during an economic downturn in Colorado, the General Assembly enacted a series of acts that were signed by the governor to address general fund revenue shortfalls. These acts directed the state treasurer to transfer to the state’s general fund over $ 442 million from thirty-one cash funds, which had been established by the General Assembly for [*3] specific purposes.
The Taxpayers filed this action in August 2004, asserting that (1) the transfers of these cash funds represented a “new tax” or a “tax policy change causing a net tax revenue gain” and occurred without voter approval in violation of TABOR; (2) some of the funds were “public trusts,” and therefore, the state as trustee had an obligation to repay the money it had transferred; and (3) the transfers created an unconstitutional “debt” in violation of Colo. Const. art. XI§§ 3-4, . The Taxpayers sought a declaratory judgment invalidating these acts and an order requiring the legislature to return the money to the funds.
Apart from their general assertions based on their status as Colorado taxpayers, Barber, Kerber, and Heggem-Lundquist also asserted individual claims alleging that transfers from the real estate recovery fund, the petroleum storage tank fund, the major medical fund, the subsequent injury fund, and the workers’ compensation cash funds, caused them economic injury.
The state defendants admit they took drastic measures, including these cash transfers, to enhance revenues to balance the state budget as required by Colo. Const. art. X, § 16. However, they [*4] maintain that the transfers were properly made and did not violate the Colorado Constitution. They point out that the General Assembly has enacted similar legislation at least twice in the past when the state faced fiscal shortfalls. In 1983, the legislature transferred money from the lottery fund, the severance tax trust fund, and sales taxes designated for the highway users tax trust fund, see 1983 Colo. Sess. Laws, ch. 438, § 6 at 1519; and in 1987, it transferred money from the water conservation board construction fund and the severance tax trust fund to prevent shortages in the general fund. See 1987 Colo. Sess. Laws, ch. 199, §§ 2 & 3 at 1108.
The parties filed cross-motions for summary judgment, and after considering the parties’ submissions, the trial court dismissed the Taxpayers’ general claims, concluding they lacked standing to raise them. The court concluded Barber had standing to contest the constitutionality of the transfer from the real estate recovery fund, and Kerber had standing to challenge the constitutionality of the transfer from the petroleum storage tank fund. However, the court dismissed Heggem-Lundquist’s specific claims challenging the transfer [*5] from the major medical fund, the subsequent injury fund, and the workers’ compensation fund, concluding it failed to show economic injury and therefore lacked standing to bring those claims.
After dismissing most of the Taxpayers’ claims for lack of standing, the trial court nevertheless addressed the merits and concluded that the transfers did not violate the Colorado Constitution, and that even if the transfers were improper, the court lacked authority to grant the relief sought by the Taxpayers.
II. Moot Claims
Initially, we conclude some of the Taxpayers’ claims are moot. A case is moot when a judgment, if rendered, would have no practical legal effect upon an existing controversy. Campbell v. Meyer, 883 P.2d 617 (Colo. App. 1994).
We will not consider and rule on the merits of an appeal when the issues presented to the trial court have become moot due to subsequent events. Campbell v. Meyer, supra. “The duty of this court, as of every other judicial tribunal, is to decide actual controversies by a judgment which can be carried into effect, and not . . . to declare principles or rules of law which cannot affect the matter in issue before [*6] it.” Barnes v. Dist. Court, 199 Colo. 310, 312, 607 P.2d 1008, 1009 (1980) (quoting People v. Dist. Court, 78 Colo. 526, 530, 242 P. 997, 998 (1925)).
Barber is a real estate broker licensed by the Colorado Division of Real Estate. He alleged that he was injured by the transfer of funds from the real estate recovery fund to the general fund, and requested an order directing repayment of funds into the real estate recovery fund. However, it is undisputed that the real estate recovery fund and the surcharge imposed on real estate licenses have been abolished, there is no fund in existence to which to return transferred monies, and there is no longer an existing controversy regarding this claim. See Colo. Sess. Laws 2005, ch. 177, § 12-61-301 at 622.
Kerber does business as Kerber’s Oil Company. He buys fuel from a large oil company and delivers it in bulk to consumers. He pays an environmental response surcharge on every tank of fuel he purchases, which surcharge goes to the petroleum storage tank fund. See §§ 8-20-206.5, 8-20.5-103(1)(d), C.R.S. 2006 (providing funding for the remediation [*7] of contamination caused by leaking petroleum storage tanks). The amount of the surcharge paid by Kerber and others depends on the balance in the fund.
Kerber alleged that he was injured by the transfer of money from that fund to the general fund, and he requested an order requiring repayment to the petroleum storage tank fund. However, it is undisputed that the funds taken from the petroleum storage tank fund have been repaid. See §§ 8-20.5-103 (2)(b)(II), 24-75-217, C.R.S. 2006. Hence, there is no existing controversy for us to decide as to this claim.
We therefore address whether the Taxpayers and Heggem-Lundquist have standing to challenge the transfers of the remaining twenty-nine cash funds.
III. Standing
The Taxpayers contend the trial court erred in concluding they lacked standing to challenge, as unconstitutional, the transfers of the cash funds because they did not directly pay into those funds. We agree.
Standing is a question of law we review de novo. Corsentino v. Cordova, 4 P.3d 1082 (Colo. 2000). To establish standing to sue, the plaintiff must show (1) an injury in fact (2) to a legally [*8] protected interest. Wimberly v. Ettenberg, 194 Colo. 163, 570 P.2d 535 (1977).
There are at least three distinct forms of standing: taxpayer standing, individual standing, and organizational standing. See Women’s Emergency Network v. Bush, 323 F.3d 937, 943 (11th Cir. 2003)(citing Doremus v. Bd. of Educ., 342 U.S. 429, 434, 72 S. Ct. 394, 397, 96 L. Ed. 475 (1952); Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S. Ct. 2130, 2136, 119 L. Ed. 2d 351 (1992); Brotman v. E. Lake Creek Ranch, L.L.P., 31 P.3d 886 (Colo. 2001)(court concluded plaintiff lacked standing to bring the action (1) as an adjacent landowner, (2) as a taxpayer, or (3) as the beneficiary of a federal trust, and discussed the different requirements for each type of standing).
The Colorado Supreme Court has construed the law to provide “broad taxpayer standing in the trial and appellate courts.” Ainscough v. Owens, 90 P.3d 851, 856 (Colo. 2004); see Conrad v. City & County of Denver, 656 P.2d 662, 668 (Colo. 1982).
A. Injury in Fact
“The ‘injury-in-fact’ requirement is dictated by the need [*9] to assure that an actual controversy exists so the matter is a proper one for judicial resolution.” Conrad, supra, 656 P.2d at 668 (concluding taxpayer had standing to challenge the constitutionality of the use of public funds to display nativity scene on the steps of the city and county building).
“To determine whether there is an injury-in-fact, we accept as true the allegations set forth in the complaint.” Ainscough, supra, 90 P.3d at 857 (citing Dunlap v. Colo. Springs Cablevision, Inc., 829 P.2d 1286, 1289 (Colo. 1992)).
The alleged injury may be tangible, like an economic loss or physical harm, or it may be intangible, like the government’s violation of legally created rights. Ainscough, supra; Olson v. City of Golden, 53 P.3d 747, 750 (Colo. App. 2002)(concluding Urban Renewal Law does not reflect a legislative intent to grant taxpayers the right to enforce § 31-25-106(1), C.R.S. 2006).
Colorado courts have recognized a wide variety of intangible injuries that may be asserted by taxpayers, including aesthetic and environmental injuries, City of Greenwood Village v. Petitioners for Proposed City of Centennial, 3 P.3d 427 (Colo. 2000) [*10] (citing Sierra Club v. Morton, 405 U.S. 727, 734, 92 S. Ct. 1361, 31 L. Ed. 2d 636 (1972)); injuries to the General Assembly’s power of appropriation, see Colo. Gen. Assembly v. Lamm, 700 P.2d 508, 510 (Colo. 1985); injuries caused by governmental preference for a particular religion, Conrad, supra; injuries based upon alteration of a particular form of government, Howard v. City of Boulder, 132 Colo. 401, 290 P.2d 237 (1955); Colo. State Civil Serv. Employees Ass’n v. Love, 167 Colo. 436, 448 P.2d 624 (1968); and injuries to taxpayers based upon unlawful expenditures of state funds, even without a direct economic injury, Dodge v. Dep’t of Soc. Servs., 198 Colo. 379, 600 P.2d 70 (1979)(concluding taxpayer had standing to challenge the constitutionality of the use of state funds to finance nontherapeutic abortions); Rocky Mountain Animal Defense v. Colo. Div. of Wildlife, 100 P.3d 508, 513 (Colo. App. 2004)(nonprofit corporation organized to enforce laws protecting wildlife and human-imposed suffering of animals had standing to challenge agency action poisoning [*11] prairie dogs, allegedly in violation of Amendment 14, which protects Colorado wildlife from inhumane and indiscriminate methods of killing; “[e]nvironmental organizations have a legitimate role in ensuring the proper interpretation and implementation of such laws”).
In cases involving a taxpayer’s standing, general allegations of injury are sufficient, and a plaintiff has standing as long as the taxpayer “argues that a governmental action that harms him [or her] is unconstitutional.” Ainscough, supra, 90 P.3d at 856. “Generally, the one who bears the financial burden of a tax is a party aggrieved and thus has standing to challenge an assessment.” Hughey v. Jefferson County Bd. of Comm’rs, 921 P.2d 76, 78 (Colo. App. 1996); see Conrad, supra, 656 P.2d at 668. “[E]ven where no direct economic harm is implicated, a citizen has standing to pursue his or her interest in ensuring that governmental units conform to the state constitution.” Nicholl v. E-470 Pub. Highway Auth., 896 P.2d 859, 866 (Colo. 1995).
B. Legally Protected Interest
The legally protected interest also may be tangible, such as a property [*12] right, or it may be intangible, such as an interest that the government acts in a manner that conforms to the Constitution. See Nicholl, supra, 896 P.2d at 866. The supreme court has held that taxpayers have an economic interest in having general tax dollars spent in a constitutional manner. Ainscough, supra, 90 P.3d at 856 (”[L]egally protected rights encompass all rights arising from constitutions, statutes, and case law.”); Conrad, supra.
TABOR also includes specific language that confers upon parties a legally protected interest to enforce its provisions. It provides: “Individual or class action enforcement suits may be filed and shall have the highest civil priority of resolution.” Colo. Const. art. X, § 20(1). This language has been interpreted to confer a legally protected interest to enforce the provisions of TABOR, which satisfies the second standing requirement. Nicholl, supra, 896 P.2d at 866 (”Although [TABOR], itself, did not create ‘rights’ vested in Colorado’s taxpayers but rather imposes ‘limitations on the spending and taxing power[s] of state and local government,’ under the [*13] terms of [TABOR], Nicholl may bring an enforcement action as an individual taxpayer.” (citation omitted)(quoting Bickel v. City of Boulder, 885 P.2d 215, 225 (Colo. 1994)).
C. Application to This Case
Accepting the allegations in the complaint as true and applying the broad taxpayer standing standard articulated by our supreme court, we conclude the Taxpayers have standing to challenge the constitutionality of the use of funds, and to present their argument that a vote of the electorate was required before the cash transfers could be effectuated. See Nicholl, supra; Conrad, supra; Dodge, supra. This standing exists because the Taxpayers have an interest in having general tax dollars spent in compliance with TABOR and Colo. Const. art. XI, §§ 3 and 4. If the Taxpayers here were determined to have no standing, we do not know who else could bring these constitutional challenges.
In reaching our conclusion, we acknowledge that taxpayer standing cases have generally involved expenditures by the legislature, whereas, here, the Taxpayers are challenging transfers of money from the cash funds into [*14] the general fund. Nevertheless, we perceive no reason for distinguishing between allegations of unlawful expenditures of state funds and the unlawful transfers of such funds. Compare Bobo v. Kulongoski, 338 Ore. 111, 107 P.3d 18 (2005)(taxpayers’ standing to bring an action against the state challenging a bill that retroactively transferred federal Medicaid funds out of the state’s general fund was unchallenged); with Rukavina v. Pawlenty, 684 N.W.2d 525, 531 (Minn. Ct. App. 2004)(taxpayers lacked standing to challenge transfer of funds from special mineral fund to the general fund to reduce budget deficit because they did not allege the action was unlawful; court concluded “the individual challenges in this case [were] based primarily on [taxpayers’] disagreement with policy or the exercise of discretion by those responsible for executing the law”).
We also distinguish the Taxpayers’ constitutional challenges in this case from circumstances in which taxpayers challenge a statute and there is no indication the legislature intended to confer upon them such an interest. See Olson v. City of Golden, supra.
The Supreme Court’s [*15] recent decision in Lance v. Coffman, U.S. , 127 S. Ct. 1194, 167 L. Ed. 2d 29 (2007), does not require a different result. That case arose after the Colorado Supreme Court announced People ex rel. Salazar v. Davidson, 79 P.3d 1221 (Colo. 2003), which invalidated a redistricting plan passed by the state legislature and ordered the use of a redistricting plan created by the state courts.
Three days after Salazar was decided, four Colorado citizens, none of whom had participated in Salazar, filed a complaint in federal district court alleging that “Article V, § 44 of the Colorado Constitution, as interpreted in Salazar, violated [the Elections Clause of the United States Constitution] by depriving the state legislature of its responsibility to draw congressional districts.” Lance v. Davidson, 379 F. Supp. 2d 1117, 1122 (D. Colo. 2005). As relevant here, a three-judge panel of the United States District Court for the District of Colorado dismissed the case, concluding that issue preclusion barred the plaintiffs’ Elections Clause claim.
The plaintiffs appealed to the Supreme Court, which upheld [*16] the dismissal on other grounds, namely that the plaintiffs lacked standing to bring their action in federal court. The Court stated:
Federal courts must determine that they have jurisdiction before proceeding to the merits. Article III of the Constitution limits the jurisdiction of federal courts to “Cases” and “Controversies.” One component of the case-or-controversy requirement is standing, which requires a plaintiff to demonstrate the now-familiar elements of injury in fact, causation, and redressability. “We have consistently held that a plaintiff raising only a generally available grievance about government–claiming only harm to his and every citizen’s interest in proper application of the Constitution and laws, and seeking relief that no more directly and tangibly benefits him than it does the public at large–does not state an Article III case or controversy.”
Lance v. Coffman, supra, U.S. at , 127 S. Ct. at 1196 (citations omitted)(quoting Lujan v. Defenders of Wildlife, supra, 504 U.S. at 573-74, 112 S. Ct. at 2143).
The Court added: “[T]his general right [possessed by every citizen, to require that [*17] the Government be administered according to law and that the public moneys be not wasted] does not entitle a private citizen to institute [a suit] in the federal courts.” Lance v. Coffman, supra, U.S. at , 127 S. Ct. at 1197 (quoting Fairchild v. Hughes, 258 U.S. 126, 129-30, 42 S. Ct. 274, 275, 66 L. Ed. 499 (1922)).
Thus, the Court in Lance v. Coffman, supra, simply restated the requirement that plaintiffs demonstrate standing under Article III before they can bring an action in federal court. However, nothing in the Court’s decision affects the standing of private citizens and taxpayers to bring lawsuits in state court alleging violations of their rights under their state constitution. While federal decisions may be considered for guidance, we are ultimately governed by state principles of standing, rather than the federal principles created by Article III of the United States Constitution and addressed in federal decisions. See Grossman v. Dean, 80 P.3d 952, 959 (Colo. App. 2003)(Colorado Supreme Court cases “reflect a more expansive view of standing under Colorado law than that expressed under federal [*18] law”).
Accordingly, we conclude the Taxpayers have standing to challenge the transfers from the special funds into the general fund, and the trial court erred in ruling otherwise.
D. Heggem-Lundquist’s Standing
However, we agree with the trial court that Heggem-Lundquist lacks standing to raise its individual challenges to transfers from the major medical, subsequent injury, and workers’ compensation cash funds into the general fund.
Heggem-Lundquist is a paint company that does interior finishes for the construction industry and individual homeowners. It is required by Colorado law to obtain workers’ compensation insurance for its employees, and it asserts that it pays approximately $ 400,000 per year in workers’ compensation insurance premiums.
It is undisputed Heggem-Lundquist does not pay the surcharge on workers’ compensation insurance premiums that is allocated to the major medical, subsequent injury, and workers’ compensation cash funds. That surcharge is assessed to its insurer. We are also unaware of any evidence in the record showing that Heggem-Lundquist’s insurer is legally obligated to pass the surcharge on to its customers, or that Heggem-Lundquist is legally required [*19] to purchase coverage from an insurer who passes through that cost. We therefore conclude Heggem-Lundquist has not shown an injury in fact, and it lacks standing to bring its individual claims. Accordingly, we affirm that part of the trial court’s order.
Because individual standing and taxpayer standing have distinct requirements, our conclusion that Heggem-Lundquist lacks standing to bring its individual claims is not inconsistent with our conclusion that it has standing to file this lawsuit in its capacity as a taxpayer, as do the other Taxpayers. See Women’s Emergency Network v. Bush, supra; Lujan v. Defenders of Wildlife, supra; Brotman, supra.
IV. Taxpayers’ Constitutional Claims
Given our conclusion that the individual claims of Barber and Kerber are moot and that Heggem-Lundquist lacks standing to bring its individual claims, the only remaining claims before us are the Taxpayers’ claims that the transfers violated TABOR and Colo. Const. art. XI, §§ 3-4. Therefore, we next address the trial court’s summary judgment in favor of the state defendants on the Taxpayers’ constitutional claims, and its conclusion that [*20] the transfers did not violate either article of the Colorado Constitution. We conclude that certain of those claims should not have been dismissed.
A. Standard of Review
We review a grant of summary judgment de novo. BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004). Summary judgment is proper if the pleadings, affidavits, depositions, or admissions show there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Civil Serv. Comm’n v. Pinder, 812 P.2d 645 (Colo. 1991). The moving party has the burden of establishing the nonexistence of a genuine issue of material fact. Pinder, supra.
We also review the interpretation of a constitutional provision de novo. Bruce v. City of Colorado Springs, 129 P.3d 988, 992 (Colo. 2006).
B. Did the Transfers Violate TABOR?
In their complaint, the Taxpayers allege that the transfers of the cash funds at issue violated TABOR, which circumscribes the revenue, spending, and debt powers of state and local governments, Bruce v. City of Colorado Springs, 131 P.3d 1187, 1189 (Colo. App. 2005), and requires [*21] voter approval in advance of the “creation of any multiple-fiscal year direct or indirect district debt or other financial obligation whatsoever.” Colo. Const. art. X, § 20(4)(b); see City of Golden v. Parker, 138 P.3d 285, 288 (Colo. 2006).
The Taxpayers do not dispute the fact that, with the exception of the unclaimed property trust fund, each of the cash funds initially was a “special fund” that consisted of fees, surcharges, and assessments. However, they maintain that the state defendants unlawfully “raided” these funds and that the transfer of some $ 442 million into the general fund to pay the general expenses of government is a “back-door tax increase” because special taxes, fees, surcharges, and assessments will be needed to replenish the money taken by the legislature. In other words, the Taxpayers maintain that the state defendants have transformed fees, surcharges, and assessments into a “new tax” or, alternatively, have effected a “tax policy change” in violation of TABOR. We disagree.
The distinction between a “tax” and a “fee” depends on the nature and function of the charge imposed. Bruce v. City of Colorado Springs, supra, 131 P.3d at 1190; [*22] Westrac, Inc. v. Walker Field, 812 P.2d 714, 716 (Colo. App. 1991).
A fee is a charge imposed on persons or property to defray costs of a particular government service. A tax is a means of distributing the general burden of the cost of government, rather than an assessment of benefits.
. . . .
A special fee is not imposed to defray the general expenses of government, but rather to defray the cost of a particular governmental service. Special fees need not be voluntary.
Bruce v. City of Colorado Springs, supra, 131 P.3d at 1190 (citations omitted)(rejecting argument that city’s street light service charge and cable television charges were taxes subject to voter approval under TABOR); see Marcus v. Kansas Dep’t of Revenue, 170 F.3d 1305, 1311-12 (10th Cir. 1999)(a tax is imposed by a legislative body to benefit the entire community whereas a fee is imposed by an agency upon those subject to its regulation to defray the agency’s regulatory expenses; court concluded an assessment was not a tax where the “essential character” of the charge was regulatory); see also Zelinger v. City & County of Denver, 724 P.2d 1356, 1359 (Colo. 1986) [*23] (service charge is not a tax where charge did not raise revenue for general municipal purposes as a “sole or principal objective”).
Although we have found no Colorado case directly addressing the Taxpayers’ argument, Colorado National Life Assurance Co. v. Clayton, 54 Colo. 256, 130 P. 330 (1913), offers guidance. There, the plaintiffs challenged a percentage charge on insurance premiums collected in the state, contending it was an illegal revenue raising measure. The Colorado Supreme Court rejected the argument, stating:
A bill designed to accomplish some well-defined purpose other than raising revenue is not a revenue measure. Merely because, as an incident to its main purpose, it may contain provisions, the enforcement of which produces a revenue, does not make it a revenue measure. . . . If the principal object is another purpose, the incidental production of revenue growing out of the enforcement of the act will not make it a bill for raising revenue.
Colorado Nat’l Life Assurance Co. v. Clayton, supra, 54 Colo. at 259, 130 P. at 332. Compare W. Heights Land Corp. v. City of Fort Collins, 146 Colo. 464, 469, 362 P.2d 155, 158 (1961) [*24] (”If [the ordinance’s] principal object is to defray the expense of operating a utility directed against those desiring to use the service, the incidental production of revenue does not make it a revenue measure. “); with Bd. of Comm’rs v. Dunn, 21 Colo. 185, 188, 40 P. 357, 358 (1895)(license fee becomes a tax “when all the elements of regulation or restraint are wanting, and the primary purpose of the act is the raising of revenue only”).
In Marcus, supra, the State of Kansas imposed an assessment for disabled parking placards, and money collected in excess of the amount necessary to administer the program was directed into the general fund. The plaintiffs filed an action in federal court challenging the assessment, contending it constituted a tax rather than a regulatory fee for purposes of the federal Tax Injunction Act. Whether the assessment was a tax or a fee was a dispositive issue because the Tax Injunction Act divests federal courts of subject matter jurisdiction over claims challenging state taxation procedures where the state courts provide a plain, speedy, and efficient remedy. Marcus, supra, 170 F.3d at 1309 [*25] (citing Lussier v. Florida, 972 F. Supp. 1412, 1417 (M.D. Fla.1997)).
The court in Marcus concluded the assessment was not a tax within the meaning of the Act, even though some of the funds collected by Kansas “ultimately reach[ed] the general fund of the county,” because “the essential character of the . . . charge [was] regulatory.” Marcus, supra, 170 F.3d at 1311-12.
Bobo v. Kulongoski, supra, is also instructive. There, taxpayers brought an action for declaratory relief against the state, challenging a bill that retroactively transferred federal Medicaid funds out of the state’s general fund. The transfer resulted in a reduction in the amount of money available in the general fund that would have been returned to taxpayers as part of a “kicker” refund. The Oregon Supreme Court upheld the transfer, concluding it was not a “bill for raising revenue” within the meaning of state constitutional provisions and therefore did not require compliance with procedural requirements, including a three-fifths vote of the state house of representatives.
The Oregon Supreme Court reasoned that the bill authorizing the transfer [*26] of funds did not raise revenue for two reasons:
First, a bill will “raise” revenue only if it “collects” or “brings in” money to the treasury. Second, not every bill that collects or brings in money to the treasury is a “bil[l] for raising revenue.” Rather, the definition of “revenue” suggests that the framers had a specific type of bill in mind–bills to levy taxes and similar exactions.
Bobo v. Kulongoski, supra, 338 Ore. at 120, 107 P.3d at 23.
The Oklahoma Supreme Court addressed the issue of when a transfer of funds becomes a tax or revenue raising measure in Calvey v. Daxon, 2000 OK 17, 997 P.2d 164, 171 (Okla. 2000). There, Oklahoma legislators challenged the constitutionality of legislative acts that transferred cash from fee-generated funds into a special cash fund. The special cash fund was created by the legislature and was “subject to legislative appropriation or transfer as provided by law and shall consist of such monies as the Legislature may direct to be transferred to said fund.” Calvey v. Daxon, supra, 997 P.2d at 167 n.4 (quoting Okla. Stat. tit. 62, § 253). The [*27] Oklahoma Supreme Court concluded the transfer of funds did not change the nature of the funds and therefore did not constitute a revenue raising measure. It reasoned as follows:
[L]aws imposing a tax or a license fee incidental thereto are not revenue raising laws [under the Oklahoma Constitution]. The [plaintiffs] contend that the fees composing the fee-generated funds, once transferred, may no longer be considered “incidental” to the regulatory scheme for which they were imposed. Nevertheless, they present no clear argument that the fees were not imposed in furtherance of the laws for which they were assessed. Rather, they insist that the transfer resulted in a change in the nature of the fees from being incidental to the legislation for which they were imposed to being general revenue for the state. We are unpersuaded by the argument. Incidental fees and taxes, not constituting revenue raising measures, do not become subject to the procedural requirements of art. 5, § 33 [which forbids raising taxes without a vote of the people] via the mere transfer from one fund to another.
Calvey v. Daxon, supra, 997 P.2d at 171 (emphasis [*28] added; footnotes omitted); see Valstad v. Cipriano, 357 Ill. App. 3d 905, 917, 828 N.E.2d 854, 868, 293 Ill. Dec. 544 (2005)(”[T]he transfer of money accumulated in special funds into a general revenue fund is generally within the legislature’s province and authority.”).
In this case, we likewise conclude the legislative acts authorizing the transfers of the cash funds did not constitute revenue raising bills or create a “new tax” or “tax policy change directly causing a net tax revenue gain,” within the meaning of Colo. Const. art. X, § 20(4). Even though these funds began as special funds, we conclude that their transfer into the general fund did not alter their “essential character.” See Marcus, supra, 170 F.3d at 1311-12; see also Baines v. New Hampshire Senate President, 152 N.H. 124, 136, 876 A.2d 768, 780 (2005)(”[M]oney bills or bills for raising revenue are confined to bills which levy taxes in the strict sense of the word, and do not apply to bills which incidentally raise revenue or involve appropriation of state money.” (quoting Opinion of Justices, 102 N.H. 80, 82, 150 A.2d 813, 815 (1959))). [*29]
The Taxpayers’ reliance on Bloom v. City of Fort Collins, 784 P.2d 304 (Colo. 1989), is misplaced. There, a class action was brought challenging the validity of a transportation utility fee imposed by the City of Fort Collins. The district court concluded the fee was an invalid tax. But, on review, the Colorado Supreme Court held the transportation utility fee imposed on owners or occupants of developed lots or parcels of land within the city was for the purpose of providing revenues for the maintenance of local streets, and was not a property tax subject to the constitutional uniformity requirement. Instead, the court concluded it was a special fee imposed on owners or occupants of developed lots fronting city streets that was reasonably related to expenses incurred by the city in carrying out its legitimate goal of maintaining city streets.
However, the supreme court struck down a section of the ordinance authorizing the city council to transfer any excess revenues not required to satisfy the purpose of the ordinance to any other fund of the city. The court explained why this pour-over provision in the ordinance was defective:
The transfer of a substantial [*30] amount of money generated by the transportation utility fee to some other city fund would be tantamount to requiring the class of persons responsible for the fee–the owners or occupants of developed lots fronting city streets–to bear a disproportionate share of the burden of providing revenues to defray general governmental expenses unrelated to the purpose for which the fee is imposed. The effect of such a transfer would be to render the transportation utility fee the functional equivalent of a tax.
Bloom, supra, 784 P.2d at 311.
We conclude Bloom is distinguishable for several reasons. First, the decision preceded the enactment of TABOR. Thus, the supreme court did not address it or rely on any other constitutional provision in reaching its result. Further, when the supreme court has addressed TABOR, it has avoided interpretations of the amendment that would hinder basic governmental operations, seeking instead to advance the purpose of TABOR, which is to limit the growth of government, and not to hinder the delivery of basic services and functions. See In re Submission of Interrogatories on House Bill 99-1325, 979 P.2d 549, 557 (Colo. 1999) [*31] (rejecting a literal interpretation of a TABOR term because it “could lead to absurd results” and “cripple the everyday workings of government”); Bolt v. Arapahoe County Sch. Dist. No. 6, 898 P.2d 525, 537 (Colo. 1995)(rejecting a rigid interpretation of TABOR “which would have the effect of working a reduction in government services”).
Here, the legislative acts authorizing the cash transfers did not increase the growth of government, create new income streams, or constitute “a tax policy change directly causing a net tax revenue gain to any district.” Colo. Const. art. X, § 20(4); see Bobo v. Kulongoski, supra. Unlike the transportation utility fee at issue in Bloom, which was structured to permit an ongoing transfer or diversion of funds, the transfers here were also one-time occurrences under extraordinary circumstances taken to address immediate revenue shortfalls. There is no indication the General Assembly intends to use special funds on a regular basis to supplement the general fund. For these reasons, Bloom does not compel the result the Taxpayers seek.
We are simply not persuaded by the Taxpayers’ argument that the transfers [*32] of the cash funds into the general funds changed them from special funds into tax funds and therefore created a “new tax” or “tax policy change directly causing a net tax revenue gain” in violation of Colo. Const. art. X, § 20(4). We therefore conclude the acts authorizing the transfers from the cash funds into the general fund did not violate TABOR.
C. Did the Transfers Violate Art. XI?
The Taxpayers also contend (1) the statutes authorizing the transfers created an obligation to repay the money transferred back to the special funds; (2) the transfers thus created “debt” in violation of Colo. Const. art. XI, § 3; and (3) the statutes authorizing the transfers did not create any new revenues to repay the obligation in violation of Colo. Const. art. XI, § 4, which prohibits the pledging of state revenue for future years without levying a tax sufficient to repay such debt. We disagree.
1. Is the Legislature Required to Repay the Money?
At the heart of the Taxpayers’ argument is their premise that the General Assembly is under an obligation to return the money it transferred from the cash funds. That premise is based on another premise, which is that some or all of the cash funds [*33] are trusts and that the state defendants, as trustees, have a fiduciary obligation to repay the money. We conclude that, with the possible exception of three funds, none of the twenty-nine cash funds at issue here is a trust.
Under our tripartite system of government, the General Assembly has plenary power over the appropriations of “state monies,” subject only to constitutional limitations. In re Interrogatories Submitted by Gen. Assembly, 88 P.3d 1196, 1200 (Colo. 2004); Colo. Gen. Assembly v. Lamm, 704 P.2d 1371, 1380 (Colo. 1985)(concluding the General Assembly’s imposition of restrictions on revenue sources for its appropriations did not violate separation of powers); see also Colo. Const. art. V, § 32 (directing the General Assembly to issue an appropriations bill to cover the expenses of the executive, legislative, and judicial departments); Colo. Const. art. V, § 33 (”No moneys in the state treasury shall be disbursed therefrom by the treasurer except upon appropriations made by law, or otherwise authorized by law. . . .”); Lamm, supra, 700 P.2d at 510; Anderson v. Lamm, 195 Colo. 437, 442, 579 P.2d 620, 623 (1978). [*34] “Plenary” is defined as “complete in every respect: Absolute, Perfect, Unqualified.” Webster’s Third New International Dictionary 1739 (1986).
An “appropriation” has been defined as “authority of the [l]egislature given at the proper time and in legal form to proper officers to apply a specified sum from a designated fund out of the treasury for a specified object or demand against the state.” Blaine County Investment Co. v. Gallet, 35 Idaho 102, 106, 204 P. 1066, 1067 (1922). If an appropriation is purely discretionary and nonobligatory, it is not a payment on a constitutional debt. See In re Interrogatory Propounded by Governor Romer, 814 P.2d 875, 889 (Colo. 1991).
Pursuant to § 24-75-201(1), C.R.S. 2006, the General Assembly designates funds into two basic categories. The general fund includes all revenues and monies not otherwise required by the state constitution or other law to be paid into another fund. Section 24-75-201(1). A “cash fund” is any fund, other than the general fund, established by law for a specific purpose or program. Section 24-75-402(2)(b), C.R.S. 2006. A “[s]tate [*35] cash fund appropriation” means “any appropriation of moneys which are not general fund moneys and which are the result of the collection of any fee authorized by law.” Section 24-75-201.1(1)(a)(VII)(D), C.R.S. 2006.
A special fund designation means that money from the general fund is not used to fund the activity for which the special fund was created. However, it does not prohibit the General Assembly from appropriating the money in the special fund for another purpose. Lamm supra, 700 P.2d at 510 (recognizing legislature’s plenary power over appropriations).
The Taxpayers acknowledge the General Assembly’s broad authority over state funds, but nevertheless contend that certain of the funds here are “public trusts,” and that the state defendants violated their fiduciary duty to the Taxpayers by transferring them into the general fund. We therefore address the nature of public trusts.
2. Public Trusts
A special fund does not become a “trust” merely because the legislature designates a purpose for which it may be expended. The existence and extent of a trust created by statute must be determined by the language of the statute. United States v. Mitchell, 445 U.S. 535, 542, 100 S. Ct. 1349, 1353, 63 L. Ed. 2d 607 (1980). [*36] The language must be specific, and the intent to impose a trust or other fiduciary duty must be manifest. Branson Sch. Dist. RE-82 v. Romer, 161 F.3d 619, 633-34 (10thCir. 1998)(the statute must enumerate the government’s duties sufficiently to justify a conclusion that the legislature intended a trust or fiduciary relationship); Dist. 22 United Mine Workers v. Utah, 229 F.3d 982, 989 (10th Cir. 2000); Brotman, supra, 31 P.3d at 893 (”[a] trust is created when a settlor conveys property to a trustee with a manifest intent to impose a fiduciary duty on that person requiring that the property be used for a specific benefit of others” (quoting Branson, supra, 161 F.3d at 633)); see Dadisman v. Moore, 181 W. Va. 779, 785, 384 S.E.2d 816, 822 (1988)(concluding that by the use of the term “Trustee” in the statute creating the public employees’ retirement system, the legislature imposed upon the trustees the highest fiduciary duty to maintain the terms of the trust).
Here, it is undisputed that only three of the statutes creating the funds expressly use the word “trust” to describe them and state [*37] that a trust fund is created. These are the Colorado children’s trust, § 19-3.5-106, C.R.S. 2006; the severance tax trust fund, § 39-29-109, C.R.S. 2006; and the unclaimed property trust fund, § 38-13-116.5, C.R.S. 2006. See In re Kroh Bros. Dev. Co., 284 B.R. 264, 271 n.17 (Bankr. W.D. Mo. 2002)(”[U]nder Colorado law, unclaimed funds do not escheat to the State, but are held in perpetuity by the State.”). None of the other funds the Taxpayers urge us to designate as “public trusts” uses the word “trust” in the enabling legislation, and thirteen of the funds contain no references to a trust or any language suggesting an intent by the legislature to create one.
In support of their argument that certain of the cash funds constitute public trusts, the Taxpayers rely on language in the enabling statutes providing that “[a]ny unexpended and unencumbered moneys remaining in the cash fund at the end of any fiscal year shall remain in the cash fund and shall not be credited or transferred to the general fund or any other fund.” Section 24-33.5-1707(1)(a), C.R.S. 2006 [*38] (Identity Theft and Financial Fraud Cash Fund); see §§ 22-7-506(4)(a)(I) (Read-to-Achieve Grant Program), 24-22-117(1)(a) (Tobacco Tax Cash Fund), 25-21.5-105(1) (Colorado Dental Program Act), C.R.S. 2006 (all similar wording).
However, we conclude this language is insufficient to show a definitive legislative intent to create a public trust. While it is undoubtedly within the legislature’s prerogative to determine whether a fund is to be a public trust or merely a special fund, we cannot overlook the fact that the legislature was explicit in designating three of the twenty-nine funds as trusts. Yet it chose not to include such express language in establishing the other cash funds.
We construe the language on which the Taxpayers rely to mean that any unspent money in these cash funds does not, by default, revert to the general fund at the end of a fiscal year. But we do not read such language as creating a public trust or as limiting the legislature’s plenary power to determine where state money is needed and to transfer special funds to meet that need. Cf. Aspen Wilderness Workshop, Inc. v. Colo. Water Conservation Bd., 901 P.2d 1251, 1263 (Colo. 1995)(Mullarkey, [*39] J., dissenting)(”[T]he concept of a public trust has no independent content. . . . Where the legislature has provided statutory directives for the management and protection of public resources, “those statutory duties ‘comprise all the responsibilities which defendants must faithfully discharge.’” (quoting Sierra Club v. Block, 622 F. Supp. 842, 866 (D. Colo. 1985), and Sierra Club v. Andrus, 487 F. Supp. 443, 449 (D.D.C. 1980))).
In reaching our conclusion, we note that some states, such as Oklahoma, have enacted public trust acts, which make it clear when a public trust has been created. For example, Okla. Stat. tit. 60, § 176.1(A) provides:
[With exceptions not relevant here] a public trust duly created in accordance with [the statute] shall be presumed for all purposes of Oklahoma law to:
(1) Exist for the public benefit;
(2) Exist as a legal entity separate and distinct from the settlor and from the governmental entity that is its beneficiary; and
(3) Act on behalf and in the furtherance of a public function or functions for which it is created even though facilities financed by [*40] the public trust or in which the public trust has an ownership interest may be operated by private persons or entities pursuant to contract.
See House of Realty, Inc. v. City of Midwest City, 2004 OK 97, 109 P.3d 314, 319 (Okla. 2004)(”The parties do not dispute that the Hospital Authority is a trust created under the provisions of sections 176 through 180.55 of Title 60, commonly referred to as Oklahoma’s ‘public trust act.’”); see also Day v. Apoliona, 451 F. Supp. 2d 1133, 1135 (D. Haw. 2006)(under Haw. Const. art. XII, § 4, the public lands granted to the state, as well as the proceeds and income derived from those lands, were to be held by the state “as a public trust” and “the State is the trustee of that public trust and is obligated to use the trust lands and funds for [certain] enumerated purposes”).
We have not been cited to any such statute in Colorado, and given the vague language in the statutes creating the cash funds at issue here, we conclude that, with the possible exception of the three funds expressly described as “trusts,” the cash funds are special funds created by statute and are not public trusts. See Travelers’ Ins. Co. v. City of Denver, 11 Colo. 434, 439-40, 18 P. 556, 559 (1888). [*41] Accordingly, we further conclude the state defendants are not trustees of such funds, they do not have a fiduciary duty to preserve the funds, and neither they nor the legislature has an obligation to repay the funds.
As to the Colorado children’s trust, the severance tax trust fund, and the unclaimed property trust fund, the state defendants argue that even if these funds are trusts, they are merely statutory trusts subject to the terms of the applicable statutes, and that as settlor of the trusts, the General Assembly has the power to revoke or modify them.
The statutes creating these funds describe their intended purposes. However, on the limited record before us, we are unable to determine as a matter of law the manner in which disbursements may be made from those funds, and the trial court did not address these specific issues. We therefore conclude summary judgment should not have been granted as to these three funds, and we remand the case for further proceedings on the issues affecting them.
3. Transfers of Special Funds
We further conclude the legislature has the authority to transfer the special funds into the general fund.
In reaching this conclusion, we observe [*42] that a number of state courts have upheld the power of their legislatures to transfer money from special funds created from specified sources, as long as the transfers did not conflict with a constitutional provision controlling such funds, invade a trust, or impair a contractual relationship. See Mitchell v. State Child Abuse & Neglect Prevention Bd., 512 So. 2d 778 (Ala. Civ. App. 1987)(money not necessary for immediate use in state trust fund financed by state income tax refund designation program could be transferred to different program); Dep’t of Pub. Welfare v. Haas, 15 Ill. 2d 204, 214, 215, 154 N.E.2d 265, 272 (1958)(”The fact that the legislature may provide that amounts, when collected, shall be placed in a certain fund does not ordinarily preclude a later General Assembly from ordering it paid into another fund or from abolishing the fund altogether.”); Des Moines Metro. Area Solid Waste Agency v. Branstad, 504 N.W.2d 888, 890 (Iowa 1993)(holding that legislature had authority to transfer groundwater protection funds into the general fund as long as it did not conflict with constitutional provision controlling such fund [*43] and did not violate a constitutional provision, a trust, or a contractual relationship); Mich. Sheriff’s Ass’n v. Mich. Dep’t of Treasury, 75 Mich. App. 516, 255 N.W.2d 666, 672 (Mich. Ct. App. 1977)(”[I]n the absence of a constitutional prohibition or a trust or contractual relationship . . . the law does allow a transfer by the Legislature from a fund established for a designated purpose into a fund whose purpose is different, providing that the fund into which the transfer is made is subject as here, to legislative control.”); Calvey v. Daxon, supra (upholding legislative acts transferring cash from fee-generated funds into “special cash fund”); Apa v. Butler, 2001 SD 147, 638 N.W.2d 57, 66 (S.D. 2001)(legislature may transfer appropriations from special funds unless prohibited by the state constitution); Dadisman v. Moore, supra, 181 W.Va. at 788, 384 S.E.2d at 825 (concluding actions of legislature to “transfer and expire” public employees’ pension trust fund appropriations before the end of relevant fiscal years were invalid, unlawful, and void).
State v. Board of Levee Commissioners, 932 So. 2d 12 (Miss. 2006), [*44] offers us additional guidance. There, as here, the state legislature enacted a bill providing for the transfer of funds. The Mississippi statute provided:
During the period beginning upon July 1, 2004 Decided, and through June 30, 2005, the Board of Levee Commissioners of the Yazoo-Mississippi Delta Levee District, upon demand of the State Fiscal Officer, shall transfer to the State Treasurer a sum or sums not exceeding a total of Five Million Dollars ($ 5,000,000), which shall be deposited into the Budget Contingency Fund.
State v. Bd. of Levee Comm’rs, supra, 932 So. 2d at 14 (quoting House Bill 1279 § 7(4) (2004)).
The Board of Levee Commissioners filed a declaratory judgment action asserting that the legislation was unconstitutional because, as relevant here, the transfer of board funds encroached upon the constitutionally vested powers of the board. Before resolving the issue, the Mississippi Supreme Court discussed the broad authority of state legislatures: “[A] state constitution does not grant specific legislative powers, but limits them, and . . . the lawmaking department possesses all legislative powers not prohibited or restricted [*45] by the state or federal constitution, and certainly the power extends to circumstances not covered by the constitutions at all.” State v. Bd. of Levee Comm’rs, supra, 932 So. 2d at 21 (quoting Farrar v. State, 191 Miss. 1, 2 So. 2d 146, 148 (Miss. 1941)).
The Mississippi Supreme Court added:
[T]he control of the purse strings of government is a legislative function. Indeed, it is the supreme legislative prerogative, indispensable to the independence and integrity of the Legislature, and not to be surrendered or abridged, save by the Constitution itself, without disturbing the balance of the system and endangering the liberties of the people. The right of the Legislature to control the public treasury, to determine the sources from which the public revenues shall be derived and the objects upon which they shall be expended, to dictate the time, the manner, and the means both of their collection and disbursement, is firmly . . . established in our political system.
State v. Bd. of Levee Comm’rs, supra, 932 So. 2d at 22 (emphasis omitted) (quoting Colbert v. State, 86 Miss. 769, 39 So. 65, 66 (Miss. 1905)). [*46]
Nevertheless, the court held that because the board was a “constitutionally-created entity,” rather than a “statutorily-created entity,” the legislature’s attempt to transfer board funds was unconstitutional: “The Legislature has the right to prescribe, alter, or change at its discretion the procedure and method of operation of the board, so long as it does not infringe upon the proper and efficient exercise of the power granted the levee commissioners by the Constitution.” State v. Bd. of Levee Comm’rs, supra, 932 So. 2d at 22.
Unlike in Board of Levee Commissioners, none of the twenty-nine cash funds at issue here was constitutionally created. Each was statutorily created by the legislature and then funded by assessments, fees, and surcharges authorized by the legislature. Thus, the restrictions placed on the Mississippi legislature by virtue of the Levee Board’s constitutionally created status do not exist in this case. We recognize that in Colorado, TABOR and Colo. Const. art. XI, §§ 3-4 place limitations on the legislature’s ability to tax and spend, as does the Due Process Clause and other provisions in the Colorado Constitution. [*47] See Colo. Const. art. II, § 25 (providing that “[n]o person shall be deprived of life, liberty or property, without due process of law”). But these limitations do not alter the fact that, unlike in Board of Levee Commissioners, where the board’s authority to administer the funds was constitutionally created, the special funds and the general fund here are all under the aegis of the Colorado legislature. Cf. Marcus v. Kansas Dep’t of Revenue, supra (holding that fees, surcharges, and assessments that are assessed by the state for a particular purpose may be used on certain occasions for a different purpose without altering their status or converting them into taxes).
We have concluded that the twenty-nine cash funds, with the three possible exceptions, do not constitute public trusts and that the money taken from such funds does not have to be repaid by the legislature. Because these cash funds were all created by the legislature, we further conclude they are subject to its inherent power to alter or amend them as well as its power under § 2-4-216, C.R.S. 2006, to reduce funding, eliminate the funds, or transfer them into the general fund. [*48] Therefore, the trial court correctly determined that the transfers of these funds into the general fund did not violate Colo. Const. art. XI, §§ 3-4.
4. Debt
We further conclude the transfers of the cash funds did not create “debt” within the meaning of Colo. Const. art. XI, §§ 3-4.
Colo. Const. art. XI, § 3 provides that the “state shall not contract any debt by loan in any form,” with certain exceptions. Colo. Const. art. XI, § 4 provides that any debt described in the article must be established by a statute that provides for the levy of a tax sufficient to pay the principal and interest on the debt.
A “debt” is created when the state creates an express obligation that pledges future revenue from a tax otherwise available for general purposes to meet the cost of the obligation. See Glennon Heights, Inc. v. Cent. Bank & Trust, 658 P.2d 872, 878-79 (Colo. 1983); Johnson v. McDonald, 97 Colo. 324, 340-41, 49 P.2d 1017, 1025 (1935). Thus, a debt is an obligation that (1) pledges revenue in future years; (2) requires the use of revenue from a tax otherwise available for a specific purpose; (3) is legally enforceable against the state in future [*49] years; or (4) future legislatures do not have the discretion over which to appropriate funds. In re Submission of Interrogatories on House Bill 99-1325, supra, 979 P.2d at 555; Glennon Heights, supra, 658 P.2d at 878-79; Gude v. City of Lakewood, 636 P.2d 691, 697 (Colo. 1981).
Here, none of the statutes authorizing the transfers pledged future revenues or revenues from taxes that are otherwise available for general purposes. Accordingly, we conclude no “debt” was created within the meaning of Colo. Const. art. XI, §§ 3-4 as a result of these transfers. See Alabama Alcoholic Beverage Control Bd. v. City of Pelham, 855 So. 2d 1070, 1080-81 (Ala. 2003)(concluding the legislature’s transfers from the Alcoholic Beverage Control Board’s operating funds to the general fund did not create a “new debt” in violation of the state constitution because the funds were not constitutionally required to be repaid).
D. Authority of Court
In its order denying the Taxpayers’ request for relief, the trial court also expressed its view that, even if the cash transfers were improper, it lacked the authority to grant the injunctive [*50] relief sought. However, on appeal, no one has questioned the authority of the courts to determine the constitutionality of actions taken by the legislative and executive branches of state government, nor do we. Bruce v. City of Colorado Springs, supra, 129 P.3d at 992 (plaintiff contended a city election violated TABOR and sought damages, a declaratory judgment, and injunctive relief); Evans v. Romer, 854 P.2d 1270, 1275 (Colo. 1993) (upholding preliminary injunction that prevented the state defendants from enforcing state constitutional amendment); Rocky Mountain Animal Defense v. Colo. Div. of Wildlife, supra (wildlife welfare group sought declaratory judgment, injunction, and mandamus relief relating to constitutional amendment prohibiting inhumane and indiscriminate methods of killing wildlife); see Marbury v. Madison, 5 U.S. (1 Cranch) 137, 180, 2 L. Ed. 60 (1803)(”a law repugnant to the constitution is void”); Baines v. New Hampshire Senate President, supra, 152 N.H. at 129, 876 A.2d at 775 (rejecting argument that whether a “money bill” violated state constitution was a nonjusticiable [*51] issue: “Reviewing whether the disputed legislation violates [the state constitution] does not demonstrate lack of respect due the legislative branch of government. Rather, it fulfills the constitutional responsibility of the judicial branch.”).
V. Conclusion
That part of the trial court’s order concluding Heggem-Lundquist lacked standing to bring its individual claims and dismissing such claims is affirmed. The court’s judgment denying Barber’s and Kerber’s individual claims is also affirmed, because those claims are now moot.
That portion of the court’s order concluding the Taxpayers lacked standing to bring their constitutional claims is reversed. The summary judgment in favor of the state defendants is reversed as to the Taxpayers’ constitutional claims pertaining specifically to the Colorado children’s trust, the severance tax trust fund, and the unclaimed property trust fund, and the case is remanded to the trial court with directions to reinstate the Taxpayers’ constitutional claims as to those three funds only and for further proceedings pertaining to them. The judgment and order are affirmed in all other respects.
JUDGE ROY concurs.
JUDGE HAWTHORNE concurs in part [*52] and dissents in part.CONCUR BY: HAWTHORNE (In Part)
DISSENT BY: HAWTHORNE (In Part)
DISSENT: JUDGE HAWTHORNE concurring in part and dissenting in part.
I concur with parts II and III(D) of the majority opinion. I respectfully dissent from part III(C), in which the majority concludes that the Taxpayers have standing to challenge transfers from the special funds into the general fund. I do not agree with the majority’s conclusion that the Taxpayers have standing in this case because I conclude they have not alleged an injury in fact and because they lack standing to assert the claims of third parties. Given these conclusions, I would not reach the merits and therefore express no opinion about part IV of the majority opinion.
I. Injury in Fact
The requirement that a plaintiff demonstrate an injury in fact derives from the constitutional separation of powers between the executive, legislative, and judicial branches of government, and prevents the judiciary from usurping the powers of other branches. See Conrad v. City & County of Denver, 656 P.2d 662, 668 (Colo. 1982); Wimberly v. Ettenberg, 194 Colo. 163, 167, 570 P.2d 535, 538 (1977); see also Colo. Const. art. III [*53] .
Another division of this court has noted that suits in which a plaintiff alleges no personal “injury or cognizable legal interest,” but instead claims standing based solely on his or her taxpayer status are “problematic.” Olson v. City of Golden, 53 P.3d 747, 750 (Colo. App. 2002). “Suits such as these highlight the tension between the judiciary’s limited powers and its role as a check on the co-ordinate branches of government. They tempt the courts to overlook prudential limitations on standing, rooted in the separation of powers, in order to redress otherwise nonjusticiable wrongs.” Olson, supra, 53 P.3d at 750 (quoting Dodge v. Dep’t of Soc. Servs., 198 Colo. 379, 384, 600 P.2d 70, 73 (1979) (Dubofsky, J., specially concurring)). This is one of those suits.
A proper determination of standing begins with a careful reading of the complaint. Here, the Taxpayers allege only that they pay taxes, and that the legislature has unconstitutionally transferred money from special funds to the general fund. In fact, with the exception of the claims discussed in parts II and III(D) of the majority’s opinion, the Taxpayers do not allege [*54] that the transfers caused them a tangible or intangible harm, or otherwise invaded their legal rights.
In a similar case, the United States Supreme Court recently determined that plaintiffs who alleged no individual harm lacked standing to challenge the Colorado Supreme Court’s interpretation of article V, § 44 of the Colorado Constitution, even though they alleged the interpretation violated the Elections Clause of the United States Constitution, art. I, § 4, cl. 1. The Court noted:
[T]he problem with this allegation should be obvious: The only injury plaintiffs allege is that the law–specifically the Elections Clause–has not been followed. This injury is precisely the kind of undifferentiated, generalized grievance about the conduct of government that we have refused to countenance in the past. . . . Because plaintiffs assert no particularized stake in the litigation, we hold that they lack standing to bring their Elections Clause claim.
Lance v. Coffman, U.S. , , 127 S. Ct. 1194, 1198, 167 L. Ed. 2d 29 (2007)(per curiam). I find no compelling distinction between the generalized nature of [*55] the allegations made by the Taxpayers in this case and those made by the plaintiffs in Lance.
Thus, even accepting the Taxpayers’ allegations as true, they do not satisfy the injury in fact requirement. See Ainscough v. Owens, 90 P.3d 851, 856 (Colo. 2004) (plaintiff has standing so long as he or she “argues that a governmental action that harms him [or her] is unconstitutional” (emphasis added)); see also Lance, supra; Brotman v. E. Lake Creek Ranch, L.L.P., 31 P.3d 886, 891-92 (Colo. 2001)(plaintiff lacked standing because it did not allege the defendant “unlawfully spent any taxpayer funds,” or that defendant’s management decisions had any effect on it “as a taxpayer”).
I disagree with the majority’s approach because it conflates the injury in fact and legally protected interest requirements. The majority concludes the Taxpayers have standing because they “have an interest in having general tax dollars spent in compliance with Colo. Const. art. XI, §§ 3 and 4.” However, this interest satisfies only the second portion of the standing inquiry, that plaintiffs demonstrate a “legally protected interest,” Wimberly, supra, 194 Colo. at 168, 570 P.2d at 539, [*56] and is insufficient, by itself, to confer standing upon the Taxpayers. See Ainscough, supra.
I also disagree with the majority’s conclusion because here the Taxpayers do not challenge an expenditure of general tax dollars, but only a transfer from special funds to the general fund; therefore, even under the majority’s analysis, they should not have standing. Cf. Conrad, supra (recognizing taxpayer standing to challenge unlawful expenditures); Dodge, supra (same); Brotman, supra, 31 P.3d at 891 (noting that the question decided in Dodge was narrow, namely, the circumstances allowing taxpayers “to challenge an allegedly unlawful expenditure of public funds”).
While I agree that Heggem-Lundquist lacks standing in this case, I respectfully suggest that the majority’s conclusion regarding Heggem-Lundquist exposes the flaws in its analysis. Heggem-Lundquist asserts standing not only based upon individual economic harm, which as the majority correctly notes is too indirect and speculative to confer standing, but also as a taxpayer challenging transfers from the major medical fund, subsequent injury [*57] fund, workers’ compensation cash fund, and other funds as unconstitutional. The majority concludes that Heggem-Lundquist lacks individual standing. This conclusion is at odds with the majority’s conclusion that the Taxpayers have standing to challenge an unconstitutional transfer of funds. Heggem-Lundquist alleges it is a taxpayer and, under the majority’s approach, should have standing to challenge as unconstitutional transfers from the major medical fund, the subsequent injury fund, and the workers’ compensation cash fund. The majority’s conclusion that Heggem-Lundquist lacks individual standing cannot be reconciled with its conclusion that the Taxpayers have standing in this case.
II. Third-Party Standing
The Taxpayers also lack standing because they raise the claims of third parties without standing to do so.
A party raising a constitutional challenge generally may not assert “the claims of third parties who are not involved in the lawsuit.” City of Greenwood Village v. Petitioners for Proposed City of Centennial, 3 P.3d 427, 439 (Colo. 2000) (a party “must demonstrate not only that the alleged unconstitutional feature of the statute injures him [or her] [*58] but also that he [or she] is within the class of persons with respect to whom the act is unconstitutional” (quoting Miller v. Albright, 523 U.S. 420, 446, 118 S. Ct. 1428, 1443, 140 L. Ed. 2d 575 (1998) (O’Connor, J., concurring))). Three exceptions to this rule exist where (1) the party before the court has a “substantial relationship” with the third party whose rights are asserted; (2) the third party’s assertion of its own rights would be difficult or improbable; or (3) the third party’s rights would be diluted if standing were denied. City of Greenwood Village, supra, 3 P.3d at 439.
The Taxpayers do not allege that they are required to pay into the special funds, or that there is any other connection between them as taxpayers and those funds. Persons required to pay into the special funds, not the Taxpayers, are the aggrieved parties that would have standing to contest the government’s allegedly unlawful transfers from those funds. See Hughey v. Jefferson County Bd. of Comm’rs, 921 P.2d 76 (Colo. App. 1996). Though asserting the rights of these third parties, the Taxpayers do not allege that they have a substantial relationship [*59] with the third parties, that the third parties would have a difficult time asserting their own rights, or that their rights would be diluted if the Taxpayers were denied standing. Accordingly, in my view the Taxpayers lack standing to challenge transfers from the special funds. See City of Greenwood Village, supra.
Because the Taxpayers do not allege an injury in fact, their claims are improper for judicial review. See Conrad; supra; Wimberly, supra; Olson, supra. Instead, the Taxpayers’ remedy is with the legislative branch of government, which is better suited to deal with “abstract questions of wide public significance.” See Warth v. Seldin, 422 U.S. 490, 500, 95 S. Ct. 2197, 2205-06, 45 L. Ed. 2d 343 (1975)(”Without such limitations . . . the courts would be called upon to decide abstract questions of wide public significance even though other governmental institutions may be more competent to address the questions and even though judicial intervention may be unnecessary to protect individual rights.”)(citing Schlesinger v. Reservists Comm. to Stop War, 418 U.S. 208, 94 S. Ct. 2925, 41 L. Ed. 2d 706 (1974)). [*60]
Because the Taxpayers’ allegations, even if accepted as true, are insufficient to demonstrate they suffered an injury in fact or to permit them to raise the claims of third parties, I disagree with the majority’s conclusion that the Taxpayers have standing in this case. Therefore, I respectfully dissent.
United States v. Spangler, 2007 U.S. App. LEXIS 6290 (11th Cir. 2007).
2007 U.S. App. LEXIS 6290,*
UNITED STATES OF AMERICA, Plaintiff-Appellee, versus MARK J. SPANGLER, Defendant-Appellant.
No. 06-13881
UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
2007 U.S. App. LEXIS 6290
March 19, 2007, Decided
March 19, 2007, Filed
NOTICE: [*1] PLEASE REFER TO FEDERAL RULES OF APPELLATE PROCEDURE RULE 32.1 GOVERNING THE CITATION FOR UNPUBLISHED OPINIONS.
PRIOR HISTORY: Appeal from the United States District Court for the Northern District of Florida. D. C. Docket No. 05-00029-CR-1-MP-AK.
DISPOSITION: AFFIRMED in part, and VACATED and REMANDED, in part.
COUNSEL: For Mark J. Spangler, Appellant: Peter Anthony Sartes, Attorney at Law, CLEARWATER, FL; George E. Tragos, The Law Office of George E. Tragos, CLEARWATER, FL.
For United States of America, Appellee: Terry Flynn, U.S. Attorney’s Office, N.D. of Florida, TALLAHASSEE, FL; E. Bryan Wilson, TALLAHASSEE, FL.
JUDGES: Before BARKETT, KRAVITCH, and STAHL, *Circuit Judges.
* Honorable Norman H. Stahl, United States Circuit Judge for First Circuit, sitting by designation.
OPINION BY: BARKETT
OPINION: BARKETT, Circuit Judge:
Mark J. Spangler pled guilty to four counts of tax fraud in violation of 26 U.S.C. § 7206(1) and agreed to make restitution to the IRS “for the tax years 1999, 2000, 2001 and 2002 in an amount to be determined by the court.” In sentencing, the district court found that Spangler owed $ 396,544 in unpaid taxes to be paid to the Internal Revenue Service (IRS), and [*2] further sentenced him to 20 months of incarceration followed by four consecutive one-year terms of supervised release.
Spangler owned a nightclub and prior to his sentencing sold the stock of the club and the liquor license to his father, James Spangler, for $ 135,000, giving Spangler a promissory note for this amount to be paid in installments of $ 1300. The court thought that this transfer was fraudulently undertaken so as to avoid liability, but noted that it could not officially avoid the transaction because doing so would affect Spangler’s father’s rights.
However, the district court ordered that the note be transferred to the government so that the payments of $ 1300 would be credited towards the amount of restitution. Spangler challenges his sentence on three bases; he argues that the district court (1) lacked the power to transfer his interest in the note to the government; (2) improperly calculated the overall loss amount; and (3) erroneously imposed consecutive, instead of concurrent, terms of supervised release. We address each of these contentions in turn.
First, Spangler contends that the district court had no authority to reach his assets.
However, in this case, [*3] Spangler concedes the IRS’s ability to use the restitution order as the basis for creating liens against Spangler’s property or to effect any other statutorily provided remedy to collect on the restitution order. See 18 U.S.C. § 3613(f); 18 U.S.C. § 3664(m)(1)(A)(i-ii). Because the government could properly use any of these methods in order to capture essentially the exact same quantity of money that the court’s order demands, and because Spangler failed to object specifically n2 to the restitution order below, we find the court’s error to be harmless.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -
n2 At oral argument, Spangler referred us to the record (DE # 72, pg. 9), where he claims that he properly preserved the objection. However, there Spangler objected to the court’s power to avoid the sale as a sham transaction, not to the court’s use of its restitution power to order payments from Spangler’s father be directed to the government.
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Second, we find no merit to Spangler’s argument that the district [*4] court erred by adopting the government’s tax loss calculations and discounting his expert’s testimony as to the proper loss amount. The court expressly found that it did not trust any of the financial figures Spangler provided to his experts and therefore rejected them. We simply cannot second guess the trial court’s credibility determinations in order to find that the trial court clearly erred in trusting the government’s figures over Spangler’s.
Finally, we agree with Spangler that the trial court erred in sentencing him to supervised release in four consecutive (rather than concurrent) terms. A 1994 amendment to the federal sentencing guidelines revised the Commentary to § 5G1.2 to clarify that 18 U.S.C. § 3624(e) requires multiple terms of supervised release to run concurrently in all cases. Indeed, 18 U.S.C. § 3624(e), which governs release of a prisoner, quite apart from the sentencing guidelines, clearly provides:
The term of supervised release commences on the day the person is released from imprisonment and runs concurrently with any Federal, State, or local term of probation or supervised release or parole for [*5] another offense to which the person is subject or becomes subject during the term of supervised release.
18 U.S.C. § 3624(e).
Even if Spangler did not oppose imposition of consecutive terms of supervised release in district court, as the government contends he did not, the imposition of consecutive terms of supervised release is clearly contrary to 18 U.S.C. § 3624(e) and constitutes plain error. Accordingly, we vacate the sentence of consecutive terms and remand to the district court with instructions to modify the terms of Spangler’s supervised release to reflect that they are to be served concurrently. See United States v. Magluta, 198 F.3d 1265, 1283 (11th Cir. 1999), vacated in part on other grounds, 203 F.3d 1304, 1305 (11th Cir. 2000).
CONCLUSION
For the foregoing reasons, the trial court’s sentencing order is AFFIRMED in part, and VACATED and REMANDED, in part.
United States v. Ryals, 2007 U.S. App. LEXIS 5712 (11th Cir. 2007).
2007 U.S. App. LEXIS 5712,*
UNITED STATES OF AMERICA, Plaintiff, Counter-Defendant-Appellee, versus JACK CARL RYALS, Defendant, Counter-Claimant Appellant.
No. 06-12308
UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
2007 U.S. App. LEXIS 5712
March 12, 2007, Decided
March 12, 2007, Filed
PRIOR HISTORY: [*1] Appeal from the United States District Court for the Northern District of Florida. D.C. Docket No. 03-00090-CV-MMP.
DISPOSITION: AFFIRM.
JUDGES: Before ANDERSON and MARCUS, Circuit Judges, and ALTONAGA, District * Judge.
* Honorable Cecilia M. Altonaga, United States District Judge for the Southern District of Florida, sitting by designation.
OPINION: PER CURIAM:
Jack Carl Ryals (”Mr. Ryals”) appeals the district court’s grant of summary judgment in favor of the United States of America (the “Government”) on its complaint, and the court’s dismissal of certain counts, and summary judgment on other counts, of Mr. Ryals’ counterclaim. The Government filed suit against Mr. Ryals seeking to reduce certain tax assessments to judgment. Mr. Ryals filed a ten-count counterclaim for tax refunds.
The lower court granted the Government’s motion for summary judgment, dismissed counts one through eight of the counterclaim on the basis that it did not have subject matter jurisdiction to entertain them, and granted summary judgment for the Government on counts nine and ten (the remaining counts) of the counterclaim. Mr. Ryals argues that summary judgment was improvidently granted because the applicable [*2] statute of limitations had expired prior to the Government’s suit. Mr. Ryals also asserts that the lower court erred when it dismissed the counterclaim, finding (1) that Mr. Ryals did not follow the proper administrative claim procedure as a prerequisite to his first eight claims, and (2) as to the final two counts of the counterclaim, that Mr. Ryals had not shown he had overpaid any tax and was not entitled to exemption from levy. Finding no error in the lower court’s decision, we AFFIRM.
I. BACKGROUND
Mr. Ryals failed to pay his federal income taxes for the 1977 and 1978 tax years. In 1989, the United States Tax Court entered a decision n1 finding that Mr. Ryals was liable for deficiencies in income tax and statutory additions for the 1977 and 1978 tax years. In June of 1989, notices of the assessment and demand for payment were issued to Mr. Ryals. The total amount of deficiencies, statutory additions and interest assessed was $ 526,465.
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n1 See Jack C. Ryals v. Comm’r, Docket No. 29418-84 (February 28, 1989).
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Despite the notices of the assessment and demand for payment, Mr. Ryals did not pay the federal income tax assessed for 1977 and 1978. By March 31, 2003, he owed the sum of $ 1,678,065 for these two tax years.
Between the notices of the assessment and March 31, 2003, Mr. Ryals, who had previously been convicted of a criminal tax offense, submitted two offers in compromise to the Internal Revenue Service (”IRS”). The first offer in compromise was presented on August 18, 1997, and related to the 1977 and 1978 tax years. The offer in compromise was presented on a form that provided that the statute of limitations on an assessment would be suspended during the period that the offer was pending and for one year thereafter. By letter dated July 17, 1998, Mr. Ryals appealed an initial rejection of the offer, but on January 7, 2000, he faxed and mailed a withdrawal of the offer, requesting that the IRS re-commence the running of the tax collection statute expiration date. Notwithstanding the January 7, 2000 communication, the offer was finally rejected on January 25, 2000.
On June 14, 2000, Mr. Ryals submitted a second offer in compromise that also related to the 1977 and 1978 federal [*4] income tax liabilities assessed. He appealed an initial rejection of that second offer by letter dated July 11, 2001. The second offer was finally rejected on March 12, 2002.
Each offer in compromise was submitted to the IRS on Form 656. Subsection (m) of Form 656 contains the following pertinent language: “The offer is pending starting with the date an authorized IRS official signs this form and accepts my/our waiver of the statutory period of limitation. The offer remains pending until an authorized IRS official accepts, rejects, returns or acknowledges withdrawal of the offer in writing.” (Doc. 33, Exs. A & C) (emphasis added). n2 Furthermore, subsection (n) provides that “[t]he waiver and suspension of any statutory periods of limitation for assessment . . . continue[s] to apply: . . . while the offer is pending. . . [and] for one additional year. . . .” (Id.). An authorized IRS official signed each of the forms submitted.
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n2 Form 656 was revised in 2000. The form Mr. Ryals used for his second offer in compromise did not contain the language shown in italics.
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During the offer in compromise process and thereafter, Mr. Ryals maintained that the revenue officer had improperly failed to allow him a statutory exemption amount under 26 U.S.C. § 6334(a)(9) because the officer was erroneously imputing tenants-by-the-entirety income to him. Thus, in May 2000, Mr. Ryals submitted Forms 1040-X, Amended United States Individual Income Tax Returns, seeking the refund of amounts he maintained had been improperly and unlawfully seized by the IRS and applied to his tax deficiencies from 1992 to 1999. Mr. Ryals and his wife had filed joint federal income tax returns for the tax years 1992 through 1999. While the Forms 1040-X that Mr. Ryals sent in May 2000 appear to have been received by the IRS, they were returned to Mr. Ryals because they included only Mr. Ryals’ signature and Social Security number, not his wife’s. The refund claims were returned to Mr. Ryals without processing by the IRS.
Mr. Ryals and his wife also filed joint federal income tax returns for the 2000 and 2001 tax years. In September 2002, Mr. Ryals filed a Form 1040-X (also missing his wife’s signature) for the years 2000 and 2001, seeking a return of what [*6] he again maintained were illegally seized earnings. On April 28, 2003, he filed a second set of Forms 1040-X and included his wife’s signature. On May 28, 2003, the IRS disallowed the claims in full.
The Government filed suit on May 20, 2003, seeking payment of the federal income taxes assessed by the Tax Court for the years 1977 and 1978. The sum requested was $ 1,678,065.01, plus fees and interest from March 31, 2003. Among the defenses raised by Mr. Ryals was a statute of limitations defense. He also presented a ten-count counterclaim seeking refund of taxes he maintained had been erroneously and illegally collected for the years 1992 to 2001. The total demand in the counterclaim was $ 166,250.00, plus interest and costs. Each count corresponded to a different tax year.
The district court entered judgment on December 8, 2005. This appeal was timely filed.
II. STANDARD OF REVIEW
The parties agree that each of the issues presented involves a question of law subject to de novo review. See Broughton v. Fla. Int’l Underwriters, Inc., 139 F.3d 861, 863 (11th Cir. 1998). The construction of federal statutes, including statutes of limitations, is a question of law. [*7] See United States v. Gibson, 434 F.3d 1234 (11th Cir. 2006). Furthermore, an order granting summary judgment is reviewed de novo. See Dixon v. Burke County, 303 F.3d 1271, 1274 (11th Cir. 2002).
III. ANALYSIS
A. Tolling of the Statute of Limitations by the Offers in Compromise
Mr. Ryals first asserts that the lower court erred in concluding that the complaint for collection after assessments was timely filed. The lower court’s decision, and this Court’s de novo review of that issue, depends on a detailed review of the facts presented as applied to several revisions in the applicable statutes. Before embarking on that review, it bears noting that statutes of limitations that bar the collection of taxes otherwise due and unpaid, as they are here, are strictly construed in favor of the Government. See Atl. Land & Improvement Co. v. United States, 790 F.2d 853, 858 (11th Cir. 1986); see also Lucia v. United States, 474 F.2d 565, 570 (5th Cir. 1973) (”[A] period of limitations runs against the collection of taxes only because the Government, through Congressional action, has consented to such a defense. [*8] Absent Government consent, no limitations defense exists.”) (citations omitted).
When a taxpayer fails to pay assessed taxes after notice and demand, the Government may bring a suit to reduce the assessment to judgment. See 26 U.S.C. §§ 7401-7403. Under 26 U.S.C. § 6502(a)(1), n3 the Government has ten years from the date of an assessment to collect a federal tax liability by bringing suit.
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n3 At the time Mr. Ryals submitted his first offer in compromise on August 18, 1997, section 6502(a)(2) provided in part:
(a) Length of period. - Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun -
* * *
(2) prior to the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer before the expiration of such 10-year period (or, if there is a release of levy under section 6343 after such 10-year period, then before such release).
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Offers in compromise operate as one way to suspend the running of the ten- year statute of limitations. See 26 U.S.C. §§ 6331(k) and (i)(5). Offers in compromise contain a waiver of the limitations period in order to enable the Government to consider the offer without the prejudice resulting from a running of the limitations period against collection of the tax. See United States v. Ressler, 576 F.2d 650, 652 (5th Cir. 1978) (citations omitted). “The running of the statutory period is suspended until the offer of compromise is terminated, withdrawn, or formally rejected.” Id. (citation omitted). Furthermore, one additional year is added to the suspension period in accordance with the parties’ agreement as contained in the Forms 656 used by the taxpayer and the IRS here.
An attempted withdrawal of an offer in compromise by the taxpayer, as Mr. Ryals attempted to effect with his 1997 offer, becomes effective only once an authorized IRS official “returns or acknowledges withdrawal of the offer in writing,” as is stated in the Form 656 submitted. See also United States v. Donovan, 348 F.3d 509, 512 (6th Cir. 2003) (offer [*10] ceases to be pending for purposes of statute of limitations when IRS officer, in writing, “accepts, rejects or acknowledges withdrawal of the offer”). While Mr. Ryals certainly communicated his withdrawal of the first offer in compromise, no written acknowledgment of the withdrawal by an IRS official was ever made.
Mr. Ryals’ tax liabilities were assessed on June 22, 1989, and this event triggered the ten-year statute of limitations. In the absence of any offers in compromise or statutory provisions altering the ten-year period, the statute of limitations on collection would have expired on June 22, 1999. A little less than two years before the expiration of the limitations period, on August 19, 1997, the first offer in compromise was submitted. This offer had the effect of suspending the ten-year statute of limitations for the time it was pending, plus one additional year. The Appeals Office rejected the first offer on January 25, 2000. Thus, the limitations period was extended by three years, five months and seven days, from the original deadline of June 22, 1999 to November 29, 2002.
However, just over one month was added to this extension by Congress’ passage, during the pendency [*11] of the first offer, of the Internal Revenue Service Restructuring and Reform Act of 1998 (”Reform Act”), Pub. L. No. 105-206, § 3461(c)(2),112 Stat. 685, 764 (1998). The Reform Act took effect on January 1, 2000, and applied to requests to extend the period of limitations made after December 31, 1999. See Reform Act at § 3461(c)(2), 112 Stat. 685, 764. As to requests to extend the limitations period made on or before December 31, 1999, however, the Reform Act amended section 6502(a)(2) and provided that where a taxpayer agreed to extend such period beyond the ten-year period contained in section 6502(a) of the Internal Revenue Code of 1986, the extension would expire on the latest of: the last day of the ten-year period; December 31, 2002; or the 90th day after the end of the period of an extension in the case of an extension in connection with an installment agreement. See Reform Act at § 3461(c)(2), 112 Stat. 685, 764. Because here the first offer was presented before December 31, 1999, and the last day of the ten-year period was June 22, 1999, the effect of the Reform Act was to extend the November 29, 2002 deadline previously computed to December 31, 2002, the [*12] “latest” of the three possible dates set forth in section 6502(a)(2). See, e.g., United States v. Elton, 429 F. Supp. 2d 561, 574-75 (E.D.N.Y. 2006) (applying Reform Act).
Analysis of the relevant events and relevant statutes for tolling purposes does not end here, however. On June 14, 2000, also after the effect of the Reform Act, Mr. Ryals submitted his second offer in compromise. This offer remained pending until March 12, 2002, when it was rejected. Several additional statutory provisions govern the effect this second offer had on the expiration of the statute of limitations.
Another change in the Reform Act, which operates to suspend the statute of limitations on collection while an offer in compromise (made on or after December 31, 1999) is pending, is the addition of section 6331(k). Under 26 U.S.C. § 6331(k), which was added by Pub. L. No. 105-206, § 3462(b), 112 Stat. 685, 765-66, the IRS is prohibited from making a levy on property or the rights to property of a person with respect to an unpaid tax while an offer in compromise by such person is pending, or if the offer is rejected, during the 30 days thereafter. n4 An [*13] offer in compromise is pending beginning on the date the Secretary accepts the offer for processing. Id. Pursuant to section 6331(i)(5), the period of limitations is suspended while the IRS is prohibited from making a levy, and section 6331(k)(3) provides that rules similar to section 6331(i)(5) apply. Because Mr. Ryals’ second offer was accepted for processing on June 14, 2000, section 6331(k) applied to suspend the statute of limitations from June 14, 2000 to April 12, 2002.
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n4 If an appeal of the rejection is filed within 30 days, the IRS cannot levy property while the appeal is pending. 26 U.S.C. § 6331(k)(1)(B).
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Later statutory enactments also apply to the determination of how this second offer in compromise served to extend the statute of limitations. These are The Community Renewal Tax Relief Act of 2000 (”Renewal Act”), Pub. L. No. 106-554, 114 Stat. 2763 (2000); and the Job Creation and Worker Assistance Act of 2002 (”Worker Assistance Act”), Pub. L. No. 107-147, § 416(e)(1), 116 Stat. 21, 55 (2002). [*14] Effective December 21, 2000, the Renewal Act eliminated the IRS’ ability to suspend the statute of limitations by agreement. n5 Therefore, the second offer suspended the limitations period only from June 14, 2000 through December 20, 2000, the effective date of the Renewal Act. The Worker Assistance Act, effective on March 9, 2002, reinstated the statutory suspension, n6 thereby tolling the limitations period until March 12, 2002, the date the IRS rejected the second offer.
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n5 The Renewal Act eliminated the suspension provision contained in the 1998 Reform Act by amending section 6331(k)(3) to delete a cross-reference to subsection (5) of section 6331(i), effective December 21, 2000.
n6 The Worker Assistance Act reinstated the statutory suspension by restoring the cross-reference to subsection (5) in section 6331(i), effective March 9, 2002.
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Thus, a total of six months and nine days of suspension, (i.e., from June 14, 2000 to December 20, 2000, plus three days from March 9, 2002 to [*15] March 12, 2002), are added to the suspension period derived by operation of the first offer in compromise. Each of the statutory amendments discussed applies to the second offer, and section 6502(a)(2) of the Reform Act applies to the first offer, because the Forms 656 that Mr. Ryals executed specifically reference any statutory periods of limitation, and the statutes at issue were each enacted before expiration of the limitations period(s) agreed upon. See Foutz v. United States, 72 F.3d 802, 806 (10th Cir. 1995) (”[T]he Form 900 that taxpayer signed . . . expressly referenced extending the ’statutory period.’. . . Treating the waiver not as a contract but as an extension of the statute of limitations, the 1990 amendments were made before the time for collection had expired.”). Because the first offer served to toll or suspend the statutory limitations period until December 31, 2002, and adding six months and nine days to that date extends the period until July 9, 2003, the suit was timely filed on May 20, 2003.
Mr. Ryals raises two principal arguments in support of his position that the suit is not timely. The first is that the Reform Act had absolutely no effect [*16] on the original tax collection statute of limitations expiration date, and thus did not extend the suspension period of the first offer in compromise from November 29, 2002 n7 to December 31, 2002. This argument is premised on Mr. Ryals attempting to discern congressional intent in first limiting (Reform Act), and then eliminating (Renewal Act), and then reinstating (Worker Assistance Act), the tolling or suspension associated with offers in compromise in the various statutes discussed above. The argument, Mr. Ryals insists, finds support in regulations promulgated during the relevant time period, and even in the initial position the Government expressed in its motion for summary judgment.
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n7 Mr. Ryals maintains the date is November 28, 2002 rather than November 29, 2002. The one-day difference is immaterial.
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The second argument is that because the IRS did not suspend its collection activities while the second offer in compromise was pending, the collection statute of limitations was not suspended. This argument [*17] is premised on the language of the applicable statute and regulation.
Addressing Mr. Ryals’ first argument, the lower court correctly discerned the effect of the Reform Act on the first offer in compromise, because it applied the clear words used in the statute. The Reform Act certainly limited the Government’s ability to contractually extend the statute of limitations. However, as to requests to extend the period of limitation made before December 31, 1999, as this one was, that remained pending on December 31, 1999, a sunset provision stated that the statute of limitations expires “on the latest of - (A) the last day of the 10-year period; (B) December 31, 2002; or (C) in the case of an extension in connection with an installment agreement, the 90th day after the end of the period of such extension.” See Reform Act, § 3461(c)(2), 112 Stat. 685, 764 (1998) (emphasis added). This express statutory language applied to the first offer in compromise. Whether or not such a construction is at odds with temporary regulations issued, n8 congressional intent, or the initial position of the Government as stated in its motion for summary judgment n9 is irrelevant because the clear [*18] words of the statute command this result. See United States v. Orozco, 160 F.3d 1309, 1313 (11th Cir. 1998) (where a statute’s language is plain, “the sole function of the courts is to enforce it according to its terms”) (citations omitted).
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n8 Mr. Ryals cites to Proposed Regulation § 301.6502-1 (March 4, 2005) to support his argument that December 31, 2002 is not the deadline under the Reform Act, because that would be contrary to the intent behind the legislative change, as presumably recognized by the IRS with its proposed regulation. Proposed regulations, however, are merely suggestions for comment and have no legal effect. See LeCroy Research Sys. Corp. v. Comm’r, 751 F.2d 123, 127 (2d Cir. 1984); Prop. Treas. Reg. § 301.6502-1(g) (section not applicable until the date final regulations are published in Federal Register).
n9 The motion for summary judgment argued that the first offer served to extend the statute of limitations to November 29, 2002, the period that the offer remained pending plus one year. In a supplemental brief in support of the motion, and filed pursuant to a court order directing the parties to address certain questions, the Government argued that literal application of the statute required the court to find that the statute was extended to December 31, 2002, which is what the lower court found.
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Mr. Ryals’ second argument is that the statute of limitations on the IRS’ collection suit should not be considered suspended during the pendency of his second offer in compromise (from June 14, 2000 to March 12, 2002), because the IRS continued collection activities during that period of time in violation of the relevant statute. In 1991, the IRS issued a wage levy to Mr. n10 Ryals’ employer, and bi-weekly payments from his employer have been sent to the IRS since that time. The wage levy issued by the IRS in 1991 continued in effect throughout the pendency of Mr. Ryals’ second offer in compromise.
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n10 Under 26 U.S.C. § 6331(e), “[t]he effect of a levy on salary or wages payable to or received by a taxpayer shall be continuous from the date such levy is first made until such levy is released under section 6343.”
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Mr. Ryals’ argument that the statute of limitations should not be considered suspended during the pendency of his second offer in compromise is based on the interplay between [*20] two provisions of 26 U.S.C. § 6331. The first one, contained in section 6331(k)(1)(A), provides that: “No levy may be made . . . on the property . . . of any person with respect to any unpaid tax - during the period that an offer-in-compromise by such person . . . is pending with the Secretary.” The second one, contained in section 6331(i)(5), n11 provides that: “The period of limitations under section 6502 shall be suspended for the period during which the Secretary is prohibited . . . from making a levy.” Relying on these two provisions, Mr. Ryals argues that, to the extent the IRS continued to levy on his property (his bi-weekly paychecks) during the pendency of his second offer in compromise, the IRS acted contrary to section 6331(k)(1)(A) and should not be permitted to benefit by having the statute of limitations on its collection suit suspended during that period. In effect, Mr. Ryals asks us to remedy the IRS’ alleged violation of the statute by treating the statute of limitations on the collection suit as having run throughout the pendency of the second offer in compromise.
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n11 Section 6331(i)(5) applies by its terms to the prohibition on levies made during the pendency of certain refund actions. But it also applies, by cross-reference, to the prohibition on levies made during the pendency of offers in compromise. See 26 U.S.C. § 6331(k)(3)(B).
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The Government acknowledges that the IRS is generally prohibited from making new levies during the pendency of an offer in compromise, but argues that this prohibition does not affect continuous, one-time levies (like the wage levy challenged by Mr. Ryals) first made before the offer in compromise became pending. The Government thus argues that the IRS did not violate section 6331(k)(1)(A) when it left in place the pre-existing levy on Mr. Ryals’ wages and that, in any event, there is no indication that Congress intended a violation of section 6331(k)(1)(A) to be remedied by running the statute of limitations on the IRS’ collection suit. Because the statutory text supports the Government’s position that the IRS did not violate section 6331(k)(1)(A), we reject Mr. Ryals’ argument to the contrary and have no occasion to decide what remedy is appropriate where such a violation has occurred.
For purposes of construing section 6331(k)(1)(A)’s general prohibition on levies made during the pendency of an offer in compromise, Congress has directed us to apply “[r]ules similar to the rules of . . . paragraph[] (3) . . . of subsection (i).” 26 U.S.C. § 6331(k)(3)(A) [*22] . The cross-referenced provision- section 6331(i)(3)-in turn contains a “rule” that states: “This subsection [subsection (i)(1),which generally prohibits levies from being made during the pendency of certain refund proceedings] shall not apply to . . . any levy which was first made before the date that the applicable proceeding under this subsection commenced.” 26 U.S.C. § 6331(i)(3)(B)(ii). By analogy, then, a rule “similar to” the rule contained in section 6331(i)(3)(B)(ii) would state: “This subsection [subsection (k)(1)(A), which generally prohibits levies from being made during the pendency of an offer-in-compromise] shall not apply to . . . any levy which was first made before the date that the offer in compromise became pending.” The upshot of the rule Congress has told us to apply in situations like this is that the IRS is not prohibited from levying on a taxpayer’s property during the pendency of the taxpayer’s offer in compromise, so long as the levy was “first made” before the date on which the offer in compromise became pending. Applying that rule to this case, we conclude that the IRS did not violate the general prohibition on levy set [*23] forth in section 6331(k)(1)(A). We therefore reject Mr. Ryals’ claim to the contrary and hold that the statute of limitations was properly suspended during the pendency of his second offer in compromise.
B. The Refund Suit: The IRS May Levy Tenancy by the Entirety Property
The remaining issue concerns the lower court’s dismissal of counts one through eight of the counterclaim and grant of summary judgment for the Government as to counts nine and ten of the counterclaim. We need not address whether the lower court was correct in its determination that it lacked subject matter jurisdiction over the first eight counts of the counterclaim upon determining that Mr. Ryals improperly filed the refund claims for the years 1992 through 1999. See e.g., Gustin v. United States, 876 F.2d 485, 489 (5th Cir. 1989) (”Gustin did not file a valid informal claim for his third quarter taxes. The district court had no jurisdiction to consider Gustin’s claim for a refund. . . .”). Assuming Mr. Ryals’ informal claims for the 1992 through 1999 tax years were sufficient, and considering the tax years of 2000 and 2001 raised in counts nine and ten of the counterclaim, we address [*24] the taxpayer’s argument that the dividend income he and his wife received as tenants by the entirety was improperly construed as wages, salary or other income under 26 U.S.C. § 6334(d).
To be entitled to a refund of taxes, a taxpayer must show that the amount he paid to the IRS “exceed[s] the amount which might have been properly assessed and demanded.” Lewis v. Reynolds, 284 U.S. 281, 283, 52 S. Ct. 145, 76 L. Ed. 293, 1932 C.B. 130, 1932-1 C.B. 130 (1932). “[T]he established law [is] that refunds are due only for overpayment of taxes.” Cindy’s Inc. v. United States, 740 F.2d 851, 854 (11th Cir. 1984) (citing 26 U.S.C. § 6402(a)). Mr. Ryals does not claim that he paid any taxes in excess of the amount(s) properly due or that he does not owe the taxes on which the levy was based. Rather, the claim is that the IRS’ levy was illegal because the dividend income Mr. Ryals and his wife received as tenants by the entirety was improperly construed as constituting wages, salary or other income under section 6334(d).
A levy is a “summary, non-judicial process, a method of self-help authorized by statute which provides the Commissioner with a prompt [*25] and convenient method for satisfying delinquent tax claims.” United States v. Sullivan, 333 F.2d 100, 116 (3d Cir. 1964) (citations omitted). The power to levy “is designed to enable the government ‘promptly to secure its revenues’ while competing claims are resolved.” United States v. Ruff, 99 F.3d 1559, 1563 (11th Cir. 1996) (quoting United States v. Nat’l Bank of Commerce, 472 U.S. 713, 721, 105 S. Ct. 2919, 86 L. Ed. 2d 565 (1985)). Section 6334 provides that certain property is exempt from levy, and subsection 6334(d) exempts from levy an amount of the taxpayer’s wages, salary or other income.
At issue for the tax years covered by the counterclaim are annual distributions of dividends Mr. Ryals received. Where a taxpayer has multiple sources of wages, salary or other income, the IRS may elect to levy on one or more of those sources while leaving other sources free from levy. Treas. Reg. § 301.6334-2(c)(1). Where the wages, salary or other income left free from levy equal or exceed the amount that qualifies for exemption from levy, the IRS “may treat no amount of the taxpayer’s wages, salary, or other income” on which [*26] it elects to levy as exempt. Id. Mr. Ryals maintains that the dividend income he and his wife received during the years in question should be disregarded in determining whether or not he had “other income.” He insists that because the dividend income was received as tenants by the entirety property, it does not qualify as “other income” under the regulation.
Admittedly, Florida law recognizes that property held by husband and wife as tenants by the entirety is not subject to execution to satisfy the debts of one spouse. See Winters v. Parks, 91 So. 2d 649,651 (Fla. 1956). However, “the IRS’s federal statutory powers to tax and attach liens to property trump[s] any state property rights afforded to a taxpayer who holds property by the entireties with her spouse.” In re Sinnreich, 391 F.3d 1295, 1297-98 (11th Cir. 2004) (discussing and limiting United States v. Craft, 535 U.S. 274, 122 S. Ct. 1414, 152 L. Ed. 2d 437 (2002), to the “unique powers granted to the IRS under federal law . . . to divide the property rights of tenancy by the entireties property”). Because Mr. Ryals had income from sources other than the source levied upon, and the income [*27] from those sources exceeded the statutory exemption amount, he was not entitled to any exemption from levy for any amount of his wages.
IV. CONCLUSION
Finding no error in the lower court’s grant of summary judgment in favor of the Government on the suit seeking to reduce tax assessment to judgment, or dismissal and summary judgment on the counterclaim for tax refunds, we accordingly AFFIRM.
Wormley v. Department of the Treasury, 2007 U.S. App. LEXIS 5920 (Ct. App. Fed. Cir. 2007).
2007 U.S. App. LEXIS 5920,*
PATRICIA A. WORMLEY, Petitioner, v. DEPARTMENT OF THE TREASURY, Respondent.
20 06-3413
UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT
2007 U.S. App. LEXIS 5920
March 13, 2007, Decided
NOTICE: [*1] THIS DECISION WAS ISSUED AS UNPUBLISHED OR NONPRECEDENTIAL AND MAY NOT BE CITED AS PRECEDENT. PLEASE REFER TO THE RULES OF THE FEDERAL CIRCUIT COURT OF APPEALS FOR RULES GOVERNING CITATION TO UNPUBLISHED OR NONPRECEDENTIAL OPINIONS OR ORDERS.
PRIOR HISTORY: Appealed from: United States Merit Systems Protection Board.
DISPOSITION: Affirmed.
COUNSEL: Patricia A. Wormley, of Cinnaminson, New Jersey, Pro se.
Gregg M. Schwind, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, for respondent. With him on the brief were Peter D. Keisler, Assistant Attorney General, David M. Cohen, Director, and Deborah A. Bynum, Assistant Director.
JUDGES: Before MAYER, GAJARSA, and PROST, Circuit Judges.
OPINION: PER CURIAM.
The petitioner, Patricia A. Wormley, seeks review of a final decision of the Merit Systems Protection Board (”Board”) affirming her removal by the Internal Revenue Service (”IRS”) for misconduct. Wormley v. Dep’t of the Treasury, No. PH-0752-06-0004-I-2 (M.S.P.B. Aug. 10, 2006). We affirm.
BACKGROUND
The IRS employed Ms. Wormley as a Tax Examining Clerk in Philadelphia. On February 11, 2005, Ms. Wormley’s manager, Sherry Gaddy, requested [*2] a meeting with Ms. Wormley to discuss her performance during her training period. Ms. Wormley refused and became belligerent with Ms. Gaddy. Concomitantly, the IRS was conducting a background investigation of Ms. Wormley and discovered that she had been arrested for biting off a portion of her neighbor’s thumb during a physical altercation. Ms. Wormley subsequently was convicted of simple assault.
Following her conviction, the IRS issued a letter to Ms. Wormley proposing an adverse personnel action on the basis of three specifications of misconduct: (1) her attack upon her neighbor, (2) her assault conviction, and (3) her inappropriate behavior toward Ms. Gaddy. The letter stated that the IRS proposed to remove her. It also stated that Ms. Wormley’s past work record, including three instances of misbehavior, had been considered. The letter invited Ms. Wormley to respond to the letter orally or in writing and advised her that she also had the right to be represented. She responded through her union representative at a hearing conducted by an IRS officer, Charles Felthaus.
After reviewing a transcript of the hearing and the entire case file, the deciding official for the IRS, Andrew [*3] Zuckerman, sent Ms. Wormley a letter sustaining the “reasons and specifications” underlying her proposed removal. The deciding official noted that he had considered all the factors stated in Internal Revenue Manual (”IRM”) § 6.752.2.7.6(4), available at http://www.irs.gov/irm/part6/ch19s01.html, in determining the penalty.
Ms. Wormley appealed her removal to the Board. An administrative judge (”AJ”) denied her appeal in an Initial Decision. The AJ found that the IRS had proven the three specifications of misconduct by a preponderance of the evidence. Ms. Wormley did not dispute the first two specifications of misconduct: 1) the attack on her neighbor, or 2) her resulting conviction for assault. With respect to the third specification, the AJ determined that Ms. Gaddy’s account of the altercation was more credible than that of Ms. Wormley. Finally, the AJ concluded that the removal penalty promoted the efficiency of the service and was a reasonable penalty.
The Initial Decision of the AJ became the Final Decision of the Board. Ms. Wormley has appealed the Final Decision regarding the removal penalty and seeks to return to her position as a Tax Examining Clerk.
DISCUSSION
This [*4] court has jurisdiction over the nondiscrimination issues in this appeal based on 28 U.S.C. § 1295(a)(9). n1 The Board’s decision regarding the reasonableness of the penalty will be sustained unless it is “(1) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law; (2) obtained without procedures required by law or regulation; or (3) unsupported by substantial evidence.” 5 U.S.C. § 7703(c).
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n1 This court only has jurisdiction to review the nondiscrimination issues in this case since no civil action regarding the discrimination issues was filed per 42 U.S.C. § 2000e-5.
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Ms. Wormley argues that the Board should have determined that the deciding official for the IRS incorrectly weighed all the Douglas factors. In support of her argument, she points to an inconsistency between the findings of the deciding official for the IRS and the findings of the Board.
The Board properly stated that the IRS was justified in using Ms. Wormley’s “past work record” in determining the penalty for her misconduct. The deciding official stated in his letter, which sustained the [*5] “reasons and specifications” of the earlier letter proposing removal, that he had considered all the factors listed in IRM 6.752.2.7.6(4) in determining the penalty. n2 One of these factors is “the employee’s past work record, including length of service, performance on the job, ability to get along with fellow workers and dependability.” Therefore, the Board properly concluded that the IRS could have relied on Ms. Wormley’s past work record in determining the penalty.
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n2 The factors listed in IRM § 6.752.2.7.6(4) are consistent with those listed in Douglas v. Veteran’s Administration, which lists the factors relevant to determining the appropriateness of a penalty. See 5 M.S.P.B. 313, 331-333 (1981).
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The Board correctly found that the deciding official for the IRS properly considered and weighed the IRM § 6.752.2.7.6(4) factors (i.e. the Douglas factors). Though the deciding official may have found some factors in Ms. Wormley’s favor (including her “good overall work record” and her lack of a “formal disciplinary record”), he concluded that her potential for violence combined with the fact that her job required working in close proximity [*6] with her co-workers and dealing personally with the general public outweighed those mitigating factors. Therefore, the Board correctly determined that the Douglas factors had been properly considered in arriving at the decision to remove Ms. Wormley.
We have considered all of Ms. Wormley’s other arguments and find them unavailing. In evaluating the penalty, the Board properly gave deference to the IRS’s discretion in maintaining employee discipline and efficiency. The Board correctly found that the removal penalty was reasonable considering Ms. Wormley’s potential for behaving violently and that her job involved working in close proximity to her co-workers and dealing personally with the general public. Therefore, the Board’s decision was neither arbitrary, capricious, unsupported by substantial evidence nor contrary to law.
For the foregoing reasons, we affirm the judgment of the Board.
No costs.
Polone v. Commissioner, 2007 U.S. App. LEXIS 5711 (9th Cir.)
2007 U.S. App. LEXIS 5711,*
GAVIN POLONE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 04-72672
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
2007 U.S. App. LEXIS 5711
April 6, 2006, Argued and Submitted, Pasadena, California
March 12, 2007, Filed
PRIOR HISTORY: [*1] Appeal from a Decision of the United States Tax Court. Tax Ct. No. 12665-00. Polone v. Comm’r, 449 F.3d 1041, 2006 U.S. App. LEXIS 13819 (9th Cir., 2006)
DISPOSITION: AFFIRMED.
COUNSEL: James M. Harris, Edwin L. Norris, Jonathan M. Brenner, Sidley Austin Brown & Wood LLP, for appellant Gavin Polone.
Bridget M. Rowan, Kenneth L. Greene, Eileen J. O’Connor, United States Department of Justice, for appellee Commissioner of the Internal Revenue Service.
JUDGES: Before: Jerome Farris and Sidney R. Thomas, Circuit Judges, and George Schiavelli,* District Judge. Opinion by Judge Thomas.
* The Honorable George Schiavelli, United States District Judge for the Central District of California, sitting by designation.
OPINION BY: Sidney R. Thomas
OPINION: THOMAS, Circuit Judge:
This appeal presents the question of whether payments received after the effective date of amendments to 26 U.S.C. § 104(a)(2) based on a defamation settlement agreement executed prior to the effective date can be excluded from gross income. We conclude that the amendments apply to payments received after the effective date of the amendment, and we affirm the judgment of the Tax Court.
I
Gavin Polone worked as a talent agent at United Talent Agency (”UTA”) from 1989 until April 21, 1996, when [*2] he was fired. After terminating Polone, UTA spoke with various entertainment industry trade publications, and made statements about Polone’s termination. Specifically, UTA alleged that Polone was terminated for “inappropriate behavior.”
Polone hired counsel, and sent UTA a demand letter on April 22, 1996. The letter alleged that UTA had made defamatory statements about Polone, and requested that UTA “cease and desist from making further defamatory statements.” On April 24, 1996, Polone filed a complaint in the Los Angeles County Superior Court alleging, among other things, wrongful termination and defamation. Polone and UTA settled both claims on May 3, 1996.
Polone received $ 2 million as settlement of the wrongful termination claim, which is not at issue in this case. As part of the settlement of the defamation claim, UTA issued a press release retracting its previous statements about Polone’s termination, and paid Polone $ 4 million. The $ 4 million was paid in four installments of $ 1 million, which Polone received on May 3, 1996; November 11, 1996; May 5, 1997; and November 11, 1998.
Polone, a cash basis taxpayer, did not include the May 1996 payment on his 1996 federal income [*3] tax return. He included the November 1996 payment, but later filed an amended 1996 return seeking a refund. He did not pay taxes on the May 1997 or November 1998 payments. Polone justified his failure to pay taxes on this income on our decision in Warren Jones Co. v. Comm’r, 524 F.2d 788 (9th Cir. 1975), alleging that Warren Jones Co. required him “to treat his receipt of his former employer’s promise to pay $ 4 million as an amount realized in the 1996 taxable year at the time of his receipt of the promise to pay.”
In September 2000, the IRS sent Polone a deficiency notice for his failure to pay taxes on the settlement payments he received in May 1996, May 1997, and November 1998. Polone petitioned for review in the Tax Court in December 2000. He also filed an amended petition in August 2002, claiming that the IRS should have reduced his 1996 taxable income by $ 1 million because he had erroneously paid taxes on the November 1996 settlement payment. The Tax Court held that Polone owed taxes on the May 1997 and November 1998 settlement payments, and that the taxes he paid on the November 1996 settlement payment were proper. Polone v. Comm’r, T.C. Memo 2003-339 (2003). [*4] The Tax Court also held that Polone did not owe any taxes on the May 1996 settlement payment. Id. He appeals.
II
Section 61(a) of the Tax Code defines “gross income” as “all income from whatever source derived.” 26 U.S.C. § 61(a). Thus, subject to certain exemptions, which are to be construed narrowly, § 61(a) applies to all income, including settlement payments. Commissioner v. Schleier, 515 U.S. 323, 328, 115 S. Ct. 2159, 132 L. Ed. 2d 294 (1995) (”the default rule of statutory interpretation [is] that exclusions from income must be narrowly construed.” (quotations omitted)); Comm’r v. Glenshaw Glass, 348 U.S. 426, 431, 75 S. Ct. 473, 99 L. Ed. 483, 1955-1 C.B. 207 (1955) (”The mere fact that payments were extracted from the wrongdoers as punishment for unlawful conduct can not detract from their character as taxable income to the recipients.”).
In May 1996, when Polone and UTA settled, 26 U.S.C. § 104 exempted “the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness” from a taxpayer’s gross income. 26 U.S.C. § 104(a)(2) (1995). The term “personal [*5] injuries” in § 104 had been interpreted to include damages from settlements of defamation claims. Roemer v. Comm’r, 716 F.2d 693, 700 (9th Cir. 1983).
Congress amended § 104 in August 1996 so that it exempted “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or periodic payments) on account of personal physical injuries or physical sickness.” 26 U.S.C. § 104(a)(1) (1996) (emphasis added). The amendment legislatively overruled court decisions, like Roemer, that had exempted awards for nonphysical injuries from a taxpayer’s gross income. See H.R. CONF. REP. 104-737 at 301 (”Thus, the exclusion from gross income does not apply to any damages received . . . based on a claim of . . . injury to reputation.”). The effective date of the amendments was August 20, 1996, but there was an exception to the amendment for “amount[s] received under a written binding agreement, court decree, or mediation award in effect on (or issued before) September 13, 1995.” 26 U.S.C. § 104, Application of August 20, 1996 Amendments.
Here, the Tax Court held [*6] that pre-amendment § 104 applied to Polone’s May 1996 payment from UTA, but that post-amendment § 104 applied to the November 1996, May 1997, and November 1998 payments because Polone received those payments after the amendment’s effective date. Polone, T.C. Memo 2003-339 at 66. As a result, it held that the May 1996 payment was tax exempt, but that the other payments were not. Id. at 68. Polone argues that the pre-amendment § 104 applies to all four settlement payments he received, and thus that the $ 4 million in its entirety is tax exempt. Whether the May 1996 version of § 104 or the amended version of § 104 governs the settlement payments that Polone received after the amendment’s effective date is a question of statutory interpretation that we review de novo. Leslie v. Comm’r, 146 F.3d 643, 648 (9th Cir. 1998).
Applying the plain language of § 104, the Tax Court properly held that the November 1996, May 1997, and November 1998 payments were taxable. The amended statute applies to any damages received after its effective date of August 20, 1996, unless the parties had contracted prior to September 13, 1995. P.L. 104-188, Title I, Subtitle F, Part 1, § 1605(d) [*7] . n1 Although Polone settled his claims with UTA in May 1996, he did not actually receive the three payments in question until well after the effective date of the amendments to § 104. Because the settlement was not in effect before September 13, 1995, it was not subject to the exception to amended § 104 for preexisting settlement agreements. Thus, the amended version of § 104 applies to the payments Polone received in November 1996, May 1997, and November 1998, and the Tax Court properly sustained the IRS’s deficiency notice.
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n1 September 13, 1995 was the date upon which Congress first proposed to amend § 104. H.R. 2491 (104th Cong., 1995).
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III
Polone, citing our decision in Warren Jones Co., argues that under 26 U.S.C. § 1001, which explains how to calculate taxable gain from the “sale or other disposition of property,” his entire settlement of $ 4 million was realized on May 3, 1996, the date of settlement, even though UTA paid him in installments. [*8] Therefore, he argues, pre-amendment § 104 applies to the entire $ 4 million he received from UTA. The application of § 1001 to Polone’s settlement with UTA is a question of statutory interpretation that we review de novo. Leslie, 146 F.3d at 648.
Section 1001 provides that the “gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis.” 26 U.S.C. § 1001(a). Although a legal claim could be considered property for purposes of § 1001, see, e.g., United States v. Stonehill, 83 F.3d 1156, 1159 (9th Cir. 1996) (holding that a legal claim is property for purposes of the federal tax lien statute, 26 U.S.C. § 6321), in order to fall within the boundaries of § 1001(a), property must be transferable, 26 U.S.C. § 1001(a). Because a personal injury claim, such as Polone’s defamation claim, is not transferable, § 1001 does not apply to a settlement of such a claim.
California Civil Code § 954 n2 permits a plaintiff to transfer actions arising out of breach of contract or injuries to personal [*9] or real property, but not defamation claims, which are “founded upon wrongs of a purely personal nature such as to the reputation or the feelings of the one injured.” Goodley v. Wank & Wank, Inc., 62 Cal. App. 3d 389, 133 Cal.Rptr. 83, 85 (Cal. App. 1976). See also Baum v. Duckor, Spradling & Metzger, 72 Cal. App. 4th 54, 84 Cal.Rptr. 2d 703, 709 (Cal. App. 1999) (”Thus, causes of action for personal injuries arising out of a tort are not assignable nor are those founded upon wrongs of a purely personal nature such as to the reputation or the feelings of the one injured.”).
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n2 We apply California law to determine whether Polone’s defamation claim was transferable for purposes of § 1001 because “state law determines the nature of the legal interest the taxpayer has in the property. Once the court determines the state-law right possessed by the taxpayer, then the federal tax consequences are solely a matter of federal law.” Stonehill, 83 F.3d at 1159.
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As the [*10] California courts have noted, defamation does not “interfer[e] with a property right, economic relations, or the sale of goods.” Truck Ins. Exch. v. Bennett, 53 Cal. App. 4th 75, 61 Cal.Rptr. 2d 497, 503 (Cal. App. 1997). Rather, “defamation invades the interest in personal or professional reputation and good name. A defamation claim vindicates personal interests, and is a personal injury.” Id. Such a personal injury cannot reasonably be transferred within the meaning of § 1001, in that one cannot sell or dispose of one’s dignity as a commodity on the open market. Because Polone’s defamation claim was not transferable under California law, his settlement with UTA could not have been a “sale or other disposition of property” for purposes of § 1001.
IV
Polone also argues that pre-amendment § 104 should apply to the settlement payments he received in November 1996, May 1997, and November 1998 because applying amended § 104 to those payments would amount to retroactive legislation in violation of his Fifth Amendment due process rights. n3
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n3 We do not address whether amended § 104(a)(2) violates the Sixteenth Amendment of the Constitution, as Polone failed to raise the issue on appeal. The power of Congress to tax income is provided in the Sixteenth Amendment: “The Congress shall have power to law and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
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We review this constitutional claim de novo. Quarty v. United States, 170 F.3d 961, 965 (9th Cir. 1999).
Retroactive legislation runs the risk of offending the Due Process Clause of the Fifth Amendment, Landgraf v. USI Film Prods., 511 U.S. 244, 114 S. Ct. 1483, 128 L. Ed. 2d 229 (1994), and the Supreme Court has provided various formulas for determining whether a particular statute applies retroactively. For example, the Court has considered whether a statute “takes away or impairs vested rights acquired under existing laws,” id. at 269 (quoting Society for Propagation of the Gospel v. Wheeler, 2 Gall. 105, 22 F. Cas. 756, F. Cas. No. 13156 (CC NH 1814)), or whether a law “changes the legal consequences of acts completed before its effective date,” id. at 269 n.23 (quoting Miller v. Florida, 482 U.S. 423, 430, 107 S. Ct. 2446, 96 L. Ed. 2d 351 (1987)).
The thrust of the various tests is that to operate retroactively, a statute must actually “attach[] new legal consequences” to completed, past conduct. Id. at 270. It is not enough that a statute “is applied in a case arising from conduct antedating the statute’s enactment,” or that a statute [*12] “upsets expectations based in prior law.” Id. at 269-270. Thus, for example, even though “a new property tax or zoning regulation may upset the reasonable expectations that prompted those affected to acquire property,” a change in the property tax regime would not be considered retroactive with respect to all who had purchased property prior to the effective date of the amendment. See id. at 270 n.24.
Applying this test to § 104, we hold that amended § 104 was constitutionally applied to the payments Polone received in November 1996, May 1997, and November 1998. As explained above, the amendment to § 104 explicitly applied only to amounts received after its effective date, which was August 20, 1996. 26 U.S.C. § 104, Application of August 20, 1996 Amendments. Although it is possible for a statute with a seemingly prospective application to apply retroactively in some circumstances, Landgraf, 511 U.S. at 258-59, the amendments to § 104 did not because they did not attach new legal consequences to completed payments. On the contrary, the amendments applied only prospectively, to payments made after their date of enactment. Compare [*13] with Untermyer v. Anderson, 276 U.S. 440, 445, 48 S. Ct. 353, 72 L. Ed. 645, 1928-1 C.B. 326, T.D. 4157 (1928) (a tax was retroactive where it applied to “bona fide gifts not made in anticipation of death and fully consummated prior to” the statute’s effective date) (emphasis added); Blodgett v. Holden, 275 U.S. 142, 147, 48 S. Ct. 105, 72 L. Ed. 206, 1928-1 C.B. 324 (1927) (same).
Polone argues that the amendments to § 104 apply retroactively because his settlement with UTA was “finalized on May 3, 1996, more than three months before the enactment of the statute.” This argument is unconvincing for two reasons. First, although the settlement contract may have been “finalized” in the sense that both parties signed it, settlement of Polone’s defamation claim was nowhere near complete as of August 20, 1996. On the contrary, UTA still had to make three payments to Polone, and he had to honor his promise to guard UTA’s confidential information. Thus, the Tax Court did not apply amended § 104 to a contract that was “fully consummated” prior to the amendment’s effective date, as was the case in Untermeyer and Blodgett. Rather, amended § 104 was applied to a contract whose fulfillment was still a work in progress. [*14] Second, Polone’s argument falls squarely into the Supreme Court’s warning that “[a] statute does not operate ‘retrospectively’ merely because it is applied in a case arising from conduct antedating the statute’s enactment.” Landgraf, 511 U.S. at 269. The fact that Polone’s tax dispute stemmed from his settlement with UTA — conduct that antedated the revisions to § 104 — does not mean that § 104 operates retrospectively when it is applied to settlement payments that Polone received after its effective date.
V
For the reasons explained above, we agree with the Tax Court that the settlement payments received by Polone after August, 1996 are taxable as ordinary income.
AFFIRMED.
United States v. Yang, 2007 U.S. App. LEXIS 5261 (7th Cir. 2007).
2007 U.S. App. LEXIS 5261,*
UNITED STATES OF AMERICA, Plaintiff-Appellee, v. YOU BIN YANG and YOU LIN YANG, Defendants-Appellants.
Nos. 06-3017 & 06-3095
UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT
2007 U.S. App. LEXIS 5261
February 7, 2007, Argued
March 7, 2007, Decided
PRIOR HISTORY: [*1] Appeals from the United States District Court for the Western District of Wisconsin. No. 05-CR-186-S–John C. Shabaz, Judge. United States v. Yang, 2006 U.S. Dist. LEXIS 42190 (W.D. Wis., June 19, 2006)
COUNSEL: For UNITED STATES OF AMERICA, Plaintiff - Appellee: Elizabeth Altman, OFFICE OF THE UNITED STATES ATTORNEY, Madison, WI USA.
For YOU BIN YANG, Defendant - Appellant: James Geis, Chicago, IL USA.
JUDGES: Before FLAUM, ROVNER, and EVANS, Circuit Judges.
OPINION BY: FLAUM
OPINION: FLAUM, Circuit Judge. On October 30, 2002, You Bin Yang called the Eau Claire Police Department (”ECPD”) to report a burglary at his home. After processing the scene, Officer Brian Schneider asked Yang if he could take five notebooks for fingerprinting. Yang acceded to the request. At the time, the IRS was investigating Yang and his brother, You Lin Yang, for tax fraud. One of the officers who knew about the IRS investigation flipped through the notebooks’ pages and saw what appeared to be accounting information, which ultimately led to an indictment against Yang and his brother. They filed a motion to suppress the notebooks, which the district court denied. Yang and his brother subsequently entered conditional guilty pleas, reserving their right to appeal the denial of the motion to suppress. [*2] They now appeal. For the following reasons, we affirm the district court’s ruling.
I. BACKGROUND
On October 30, 2002, You Bin Yang called the ECPD to report a burglary at his home. Officer Dave Kleinhaus responded to Yang’s call. When he arrived at Yang’s residence, Yang told him that the burglars had taken a DVD player from his bedroom and $ 2,500 from his parents’ bedroom. Officer Kleinhaus surveyed the ransacked home, noting that the burglars had displaced the dresser drawers in both Yang’s and his parents’ bedroom. After viewing the residence, Kleinhaus requested an evidence technician.
Officer Brian Schneider arrived to process the scene. In the course of his work, he found five notebooks in and around the dresser in Yang’s parents’ room. Three of the notebooks were spiral bound and two were bound book-style. The three spiral notebooks were each labeled with a year: 2000, 2001, and 2002. None of the notebooks were sealed. Officer Schneider told Yang that he wanted to take the notebooks to the police department to process them for fingerprints, and Yang gave him permission to do so. At the time of the burglary, Yang, his brother, and his father were under investigation [*3] for tax fraud in connection with their ownership of the China Buffet Restaurant in Eau Claire.
On November 1, 2002, Yang called the police department and asked Sergeant Eric Larsen when he could retrieve his notebooks. Larsen, who knew about the IRS investigation, told Yang that he could probably have them back by November 4. Yang asked Larsen if the fingerprinting could be done earlier because Yang needed one notebook in particular. Larsen told Yang that he would talk to the evidence technician and ask if the tests could be run sooner.
Sergeant Larsen checked the notebooks out of evidence and reviewed their contents. Larsen saw that the notebooks appeared to contain the restaurant’s financial records written in Chinese. Larsen began copying the 2002 notebook. While he was making the copies, the evidence technician arrived and told Larsen that most of the fingerprinting tests would be performed on the notebook covers but that if the fingerprinting powder touched the inside pages, it could make the writing difficult to read.
Larsen stopped copying the 2002 notebook and called Yang. Larsen told Yang that the fingerprint powder might damage the writing in the notebooks, but he did [*4] not inform Yang that he had already started to copy one of them. Yang gave Larsen permission to copy the contents of each notebook, and Larsen told Yang that he could pick up any of the notebooks that he needed. Later that day, Yang picked up the 2002 notebook.
Larsen contacted IRS Criminal Investigations Special Agent Steven Makowski and told him that the police possessed what appeared to be accounting notebooks from Yang’s residence. Makowski obtained a grand jury subpoena for copies of the notebooks and served it on the evidence technician on November 4, 2002. The evidence technician gave the notebooks to Makowski, who translated the writing into English and discovered that the notebooks contained evidence of tax fraud.
On December 13, 2005, a grand jury indicted Yang and his brother for conspiracy to commit tax fraud, filing false tax returns, and conspiracy to structure currency transactions for the purpose of evading currency transaction reporting requirements.
On March 10, 2006, the brothers moved to suppress the evidence from the notebooks, arguing that the ECPD violated You Bin Yang’s Fourth Amendment rights. The magistrate judge denied the defendants’ motion to suppress, [*5] holding that Yang had no expectation of privacy in the notebooks once he turned them over to the police. The district court issued an order adopting the magistrate judge’s report and recommendation. On May 2, the defendants entered conditional guilty pleas, reserving the right to appeal the suppression issue. On July 12, the district court sentenced the defendants to 34 months in prison.
II. ANALYSIS
Yang and his brother contend that the district court erred by denying their motion to suppress. Specifically, Yang and his brother argue that the government violated their Fourth Amendment rights by searching through the contents of the notebooks. The government responds that Yang had no expectation of privacy in the notebooks after he gave them to Officer Schneider. This Court reviews legal determinations related to a motion to suppress de novo and findings of fact for clear error. United States v. Lawshea, 461 F.3d 857, 859 (7th Cir. 2006).
The Fourth Amendment provides that “[t]he right of the people to be secure in their persons, houses, papers, and effects. .. shall not be violated, and no Warrants shall issue, but upon probable cause. . .” U.S. Const. amend. IV [*6] . The Constitution thus protects against warrantless intrusions, but only where an individual has a “legitimate expectation of privacy.” Rakas v. Illinois, 439 U.S. 128, 143, 99 S. Ct. 421, 58 L. Ed. 2d 387 (1978). Whether an expectation of privacy exists for Fourth Amendment purposes depends upon two questions: 1) whether the individual, by his conduct, has exhibited an actual expectation of privacy; and 2) whether the individual’s expectation of privacy is one that society is prepared to recognize as reasonable. Katz v. United States, 389 U.S. 347, 361, 88 S. Ct. 507, 19 L. Ed. 2d 576 (1967). A defendant objecting to a search bears the burden of proving that he or she had a legitimate expectation of privacy in the item searched. United States v. Pitts, 322 F.3d 449, 456 (7th Cir. 2003).
The Supreme Court has noted that an individual claiming a subjective expectation of privacy must exhibit that expectation, i.e., he or she must not have manifested by his or her conduct a voluntary consent to the defendant’s allegedly invasive actions. Kyllo v. United States, 533 U.S. 27, 33, 121 S. Ct. 2038, 150 L. Ed. 2d 94 (2001). In other words, Yang must demonstrate [*7] that he sought to preserve the contents of the notebooks as private. See United States v. Waller, 426 F.3d 838, 844 (6th Cir. 2005). Moreover, a hope of privacy is not an expectation of privacy. California v. Rooney, 483 U.S. 307, 321, 107 S. Ct. 2852, 97 L. Ed. 2d 258 (1987) (White, J., dissenting).
Courts applying the subjective expectation prong have looked to the individuals’ affirmative steps to conceal and keep private whatever item was the subject of the search. See MacWade v. Kelly, 460 F.3d 260, 272 (2d Cir. 2006) (noting that “a person carrying items in a closed, opaque bag has manifested his subjective expectation of privacy”); United States v. Davis, 332 F.3d 1163, 1168 (9th Cir. 2003) (stating that “by placing his gym bag under the bed, [the defendant] ‘manifested an expectation that the contents would remain free from public examination’”); United States v. Mackey, 626 F.2d 684, 687 (9th Cir. 1980) (holding that the defendant had no expectation of privacy in the contents of a paper bag because it is among the least private of containers, is easily torn, cannot be latched, and its contents can be easily [*8] discerned); People v. Sutherland, 92 Ill. App. 3d 338, 415 N.E.2d 1267, 1271, 47 Ill. Dec. 954 (Ill. App. Ct. 1980) (holding that the defendant did not have a subjective expectation of privacy in his clothes when he took them off for treatment of a gunshot wound at a hospital because he did not specify that the clothes should not be given to anyone else).
Yang did not manifest a subjective expectation of privacy in the notebooks. Rather, he voluntarily allowed Officer Schneider to take the notebooks in their entirety to the police station and hold them for several days. He placed no limitations on access to the notebooks. He did not separate the notebook covers and keep the written contents to himself. He did not request that the officers perform the fingerprint analysis in his presence. He did not close or secure the contents of the notebook in anyway so that only the covers could be accessed. Indeed, Yang permitted Sergeant Larsen to make copies of the notebooks’ pages. In short, because Yang took no affirmative steps to demonstrate any expectation of privacy in the notebooks, he cannot prevail.
Yang maintains that although the ECPD had lawful possession of his [*9] notebooks, that possession did not give Officer Larsen the right to search their contents. Yang cites Walter v. United States, 447 U.S. 649, 100 S. Ct. 2395, 65 L. Ed. 2d 410 (1980), in support of his argument. In Walter, the Supreme Court recognized the privacy right of an owner of pornographic films who shipped them by private carrier. The films were labeled, then wrapped and sealed. The packages were erroneously delivered to a recipient who opened the boxes and saw explicit drawings depicting the films’ content. The recipient called the FBI, whose agents later viewed the films without obtaining a warrant. The Court held that “the fact that the FBI agents were lawfully in possession of the boxes of film did not give them authority to search their contents.” Id. at 654. The Court explained that the defendant had a reasonable expectation of privacy in the films because he “expected no one except the intended recipient either to open the 12 packages or to project the films.” Id. at 658. Walter is distinguishable from our case. There, the owner manifested his expectation of privacy in the films’ contents by securely wrapping, sealing, and sending [*10] them to a private party. As explained above, Yang took no such precautions.
Yang also asserts that this case is governed by Le Clair v. Hart, 800 F.2d 692 (7th Cir. 1986). In Le Clair, the plaintiffs were the subject of two separate federal investigations, one by the Fish and Wildlife Service (”FWS”) and one by the IRS. Id. at 693. The IRS agent running the investigation learned that the FWS had obtained a warrant and scheduled a search of the plaintiffs’ home. The IRS agents asked to accompany the FWS agents on the search as observers. The IRS agents did not wear badges or identify themselves as IRS agents. Id. One of the IRS agents searched the home for three hours dictating verbatim into a taperecorder from certain financial records not covered by the FWS warrant. The plaintiffs were indicted for tax evasion as a result of the dictations, and the plaintiffs sued. This Court, reviewing the denial of qualified immunity, held that the plaintiffs had alleged a constitutional violation. Id. at 696. In Le Clair, unlike in our case, there was never any question of the plaintiffs’ legitimate privacy expectation in their financial [*11] documents. They were at all times within the confines of the plaintiffs’ home, they were not the subject of the FWS warrant, and the plaintiffs never gave the documents to the IRS agents for perusal.
Because Yang had no subjective expectation of privacy in the notebooks, we need not reach the objectively reasonable inquiry.
III. CONCLUSION
For the above stated reasons, we AFFIRM the judgment of the district court.
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