Robb Evans & Associates, LLC v. United States, 2017 U.S. App. LEXIS 3888

Background

Robb Evans & Associates (the Receiver) sought a $9,387,235 tax refund on behalf of judgment debtors (the Puccios and related for-profit companies) after a class-action judgment required return of funds those entities obtained from consumers.
The taxpayers had reported and paid tax on those monies in prior years; the Receiver argued § 1341(a) lets a taxpayer reduce tax in the year of repayment by the tax increase from the year of receipt (the § 1341 computation).
The IRS denied the administrative refund claims; the Receiver sued for refund in district court. The district court denied the government’s motion to dismiss and allowed the refund claim on equitable grounds but limited the refund to monies actually collected and deposited in a Qualified Settlement Fund.
On appeal, the government argued § 1341(a) does not apply because the taxpayers never appeared to have an "unrestricted right" to the funds (they obtained them by fraud); the Receiver argued collateral estoppel and equitable exceptions barred imputation of the taxpayers’ fraud to the Receiver and also asserted a constructive trust theory.
The First Circuit concluded the taxpayers were previously adjudicated to have obtained funds by fraud; under § 1341(a) and precedent a fraudster cannot be deemed to have appeared to have an unrestricted right to ill-gotten gains, so the Receiver cannot obtain § 1341 relief; the Receiver’s constructive trust argument was waived and insufficient.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether § 1341(a) applies when original payee obtained funds by fraud	Receiver: § 1341 should apply to permit refund because repayment and deduction are available and equities favor victims	U.S.: § 1341 requires that at time of inclusion it must have appeared taxpayer had an unrestricted right; fraudsters cannot meet that test	Held for U.S.: collateral estoppel establishes taxpayers obtained funds by fraud; therefore § 1341(a) does not apply
Whether Receiver is collaterally estopped from contesting the fraud finding	Receiver: prior findings shouldn’t bind Receiver or equitable considerations prevent imputing fraud	U.S.: prior class-action adjudication is final and preclusive	Held for U.S.: federal common-law collateral estoppel applies; fraud finding is preclusive
Whether district court may create equitable exception to § 1341 to benefit Receiver	Receiver/district court: equity prevents imputing fraud to Receiver; § 1341’s purpose supports relief	U.S.: statutory text controls; courts may not override plain statutory requirements for equitable reasons	Held for U.S.: court may not rewrite clear statutory text; no equitable exception to the "unrestricted right" requirement
Whether Receiver may recover via constructive trust theory against the government	Receiver: constructive trust on fraudulently obtained funds makes IRS holding those funds subject to trust and refundable	U.S.: constructive trust argument was not timely raised and is not a basis to claw back taxes paid to the Treasury	Held for U.S.: argument waived and, on the merits, inadequate to require refund

Key Cases Cited

Culley v. United States, 222 F.3d 1331 (Fed. Cir. 2000) (fraudsters cannot appear to have an unrestricted right to ill-gotten gains for § 1341)
United States v. Skelly Oil Co., 394 U.S. 678 (U.S. 1969) (explaining § 1341 computation alternative)
James v. United States, 366 U.S. 213 (U.S. 1961) (unlawful receipts are includible in gross income)
INDOPCO, Inc. v. Comm'r, 503 U.S. 79 (U.S. 1992) (tax deductions are matters of legislative grace and strictly construed)
Conn. Nat'l Bank v. Germain, 503 U.S. 249 (U.S. 1992) (statutory text is the best indicator of congressional intent)
McKinney v. United States, 574 F.2d 1240 (5th Cir. 1978) (discussing § 1341 and fraudsters' inability to satisfy the unrestricted-right requirement)
Seggerman Farms, Inc. v. Comm'r, 308 F.3d 803 (7th Cir. 2002) (declining to disregard plain language of tax code despite harsh results)