Mingo v. CommissionerMingo v. Commissioner
Thus, the complaint‘s allegations are sufficient to survive Kaelin‘s motion to dismiss.
Given the facts and reasonable inferences drawn from Burnside‘s complaint, he has alleged a retaliatory, demotion-like transfer following the non-endorsement of Sheriff Kaelin in 2012, in violation of his First-Amendment right of free speech and association. And, the law is clearly established that such a retaliatory action, if proved, violates the First Amendment. Therefore, Kaelin is not entitled to qualified immunity at this motion-to-dismiss stage for the 2012 transfer.
B. Termination
As alleged in the complaint, Burnside‘s termination resulted from the dissemination of a tape recording that contained Sheriff Kaelin‘s threat against another officer. The complaint reveals no details about the recording, its dissemination, or Kaelin‘s purported threat. And, the complaint lacks allegations sufficient to allow any reasonable inferences about such details as might be required to state a prima facie case. Without some direct allegation or reasonable inference that Burnside was involved with the recording in some way, there can be no violation of Burnside‘s First-Amendment rights based on the recording because we are missing a critical element of the claim: some connection to a constitutionally protected act.
The only protected activities in Burnside‘s complaint occurred in January 2012, when Burnside and the PAC he chaired failed to endorse Kaelin. But that occurred more than thirteen months before his employment was terminated in March 2013. The complaint alleges no other facts linking the two events. Without such facts, we cannot plausibly infer that the termination was causally related to Burnside‘s First-Amendment conduct. And, without a causal link between the termination and Burnside‘s protected activities, there can be no claim of a constitutional violation as a matter of law. Consequently, Kaelin is entitled to qualified immunity on Burnside‘s termination claim.
IV. Conclusion
For the reasons above, we REVERSE the district court‘s denial of qualified immunity as to the termination claim and AFFIRM the denial of qualified immunity as to the transfer claim. We REMAND for further proceedings consistent with this opinion.
REVERSED in part; AFFIRMED in part; and REMANDED.
Regina Sherry Moriarty, Jonathan S. Cohen, Kathryn Keneally, Gilbert Steven Rothenberg, Esq., Deputy Assistant Attorney, U.S. Department of Justice, William J. Wilkins, Internal Revenue Service, Washington, DC, for Respondent-Appellee.
Before KING, GRAVES, and HIGGINSON, Circuit Judges.
JAMES E. GRAVES, JR., Circuit Judge:
In 2002, Petitioners-Appellants Lori M. Mingo and John M. Mingo, married taxpayers, reported the sale of a partnership interest, including the portion of the proceeds attributable to the partnership‘s unrealized receivables (“unrealized receivables“), through the installment method of accounting. In an action brought to determine their federal income tax liability, the tax court held that the Mingos were not entitled to utilize the installment method to report the unrealized receivables. The tax court further held that the Commissioner of Internal Revenue (“the Commissioner“) appropriately applied
FACTUAL AND PROCEDURAL BACKGROUND
The material facts in this case have been stipulated and are not in dispute. The relevant factual background, as recited by the tax court, is as follows:
Petitioners are husband and wife and were married for the years at issue. Mrs. Mingo joined PricewaterhouseCoopers, LLP (“PWC“) sometime before tax year 2002. Mrs. Mingo was a partner in the management consulting and technology services business (“consulting business“) of PWC until tax year 2002, when PWC sold its consulting business to International Business Machines Corporation (“IBM“).
As an initial step in the transaction, PWCC, L.P. (“PwCC“), a partnership, was formed in April or May 2002. PwCC was owned by certain subsidiaries of PWC. As part of the transaction, PWC transferred its consulting business to PwCC. Among the assets PWC transferred to PwCC were its consulting business’ uncollected accounts receivable for services it had previously rendered (unrealized receivables). PWC then transferred each of the 417 consulting partners (collectively, consulting partners) an interest in PwCC and cash in exchange for the partner‘s interest in PWC. Mrs. Mingo was one of these partners, and she received a partnership interest in PwCC and cash from PWC in exchange for her partnership interest in PWC.
The value of Mrs. Mingo‘s partnership interest in PwCC as of October 1, 2002, was $832,090, of which $126,240 was attributable to her interest in partnership unrealized receivables. On that date,
On October 1, 2002, IBM gave Mrs. Mingo a convertible promissory note (note) for $832,090 in exchange for her interest in PwCC. The $126,240 attributable to her interest in partnership unrealized receivables was included in that face value. The note included the following terms:
- Mrs. Mingo had the right to convert all or any portion of the unpaid principal balance into IBM common stock at any time after the first anniversary of closing. However, any such conversion had to be in increments of $1,000 principal amounts or for the entire unpaid principal.
- unless the note is converted into IBM stock, IBM would pay interest on the unpaid principal balance semiannually.
- the outstanding principal amount of the note and any accrued and unpaid interest was due and payable on the fifth anniversary of the transaction‘s closing (i.e., October 1, 2007).
On their 2002 Federal income tax return and on an attached Form 6252, Installment Sale Income, petitioners reported the sale of Mrs. Mingo‘s interest in PwCC as an installment sale. The selling price, gross profit, and contract price were listed as $832,090. Petitioners did1 not recognize any income relating to the note other than interest income on their 2002 Federal income tax return.
Petitioners did not convert any portion of the note during tax years 2002, 2003, 2004, 2005, and 2006. Petitioners also did not report any income other than interest income from the note for any of those years.
During tax year 2007 petitioners converted the entirety of the note in a series of transactions. On February 26, 2007, petitioners converted a portion of the note into shares of IBM stock worth $929,765. Also on February 26, 2007, petitioners sold those shares of IBM stock for a total of $899,287. On October 1, 2007, petitioners converted the remainder of the note into shares of IBM stock worth $283,494.
Mingo v. Comm‘r, 105 T.C.M. (CCH) 1857, at *1-2 (2013) (footnote omitted).
On May 23, 2007, the Commissioner issued a notice of deficiency for 2003. The Commissioner contended that the $126,240 Mingo had received in exchange for the partnership‘s unrealized receivables was not eligible for reporting under the installment method. Accordingly, the Commissioner concluded that Mingo should have reported this amount as ordinary income in 2002 and paid taxes on it then. Although the limitations period for adjusting Mingo‘s 2002 tax return had expired by May 23, 2007, the Commissioner adjusted Mingo‘s 2003 tax return to reflect the income that arguably should have been reported in 2002. The Commissioner contended that since Mingo‘s use of the installment method of accounting did not clearly reflect her income, the Commissioner was entitled to change her accounting method pursuant to
In her 2007 tax return, Mingo reported profit from the conversion of the promissory note as long-term capital gains and paid taxes on it. On July 21, 2010, the Commissioner issued a notice of deficiency for 2007. In this second notice of deficiency the Commissioner argued, in the alternative, that if Mingo‘s use of the installment method was proper, the $126,240 attributable to unrealized receivables that was reported in 2007 should have been taxed as ordinary income rather than capital gains.
Mingo challenged both of the Commissioner‘s deficiency determinations before the tax court. The tax court found in favor of the Commissioner‘s first notice of deficiency in stating that “the gain realized on Mrs. Mingo‘s partnership interest, to the extent attributable to partnership unrealized receivables, was ... ineligible for installment method reporting.” Mingo, 105 T.C.M. 1857, at *5. Accordingly, the tax court concluded that Mingo “should have properly reported an additional $126,240 of ordinary income on [her] 2002 Federal income tax return instead of reporting it under the installment method.” Id. The tax court further determined that Mingo‘s “chosen accounting method did not clearly reflect income with respect to the portion of the note attributable to partnership unrealized receivables.” Id. at *6. Therefore, the tax court held that the Commissioner properly “made a section 481(a) adjustment of $126,240 [to taxable income] for tax year 2003, the year for which [he] initiated the change of accounting method” as “necessary to remedy the omission of ordinary income that occurred in tax year 2002 as a result of petitioners’ impermissible election to use the installment method.” Id. at *7. Mingo now appeals the tax court‘s ruling.
STANDARD OF REVIEW
Generally, we review appeals from the tax court under the same standards by which we review district court appeals. Comm‘r v. Brookshire Bros. Holding, Inc., 320 F.3d 507, 509 (5th Cir. 2003). Preserved challenges to conclusions of law are reviewed de novo; while, preserved challenges to factual issues are reviewed for clear error. See id. Because this case was decided on stipulated facts, we review only the contested issues of law.
DISCUSSION
On appeal, Mingo challenges the Commissioner‘s determination that the installment sale reporting of the unrealized receivables in 2002 did not clearly reflect her income. Mingo also contests the Commissioner‘s authority to change her method of accounting in 2003, given that the allegedly erroneous reporting under the installment method occurred in 2002, the year of the sale.2
Method of Accounting that Clearly Reflects Income
Section 446(b) provides that if a taxpayer‘s method of accounting does not clearly reflect her taxable income, the Secretary shall determine the method of accounting that does clearly reflect her taxable income.
Section 741 specifically provides that gain from the sale of a partnership interest shall ordinarily be considered gain from the sale or exchange of a capital asset with some exceptions that are outlined in
The central dispute raised by Mingo in the instant action is the legal question of whether the installment method can be used to report the portion of the partnership interest attributable to unrealized receivables, given its status as ordinary income. We agree with Sorensen v. Commissioner, 22 T.C. 321 (1954) and conclude that the unrealized receivables are not eligible for installment method reporting. In Sorensen, the petitioner was granted stock options, which he sold and reported as long-term capital gain using the installment method. Id. at 335. In exchange for the sale of the stock options, the petitioner received cash as well as notes. Id. at 341-42. The tax court found that the proceeds from the sale of the stock options constituted compensation for services and were therefore ordinary income, not eligible for installment method reporting. Id. at 342. The tax court in Sorensen explained:
Since the sales of the options operated to compensate petitioner for his services, what he received in the form of both cash and notes was income by way of compensation. The provisions of section 443 relate only to the reporting of income arising from the sale of property on the installment basis. Those provisions do not in anywise purport to relate to the reporting of income arising by way of compensation for services.
Id. (emphasis added).
Likewise, in the case at hand, the proceeds from the unrealized receivables, classified as ordinary income, do not qualify for installment method reporting because they do not arise from the sale of property. See id.; see also Hyatt v. Comm‘r, 20 T.C.M. (CCH) 1635, (1961), aff‘d, 325 F.2d 715 (5th Cir. 1963) (finding that an amount which constituted a substi-tute
Change of Accounting Method in 2003
When the Commissioner determines that a different method of accounting should be utilized, the Commissioner may change the method of accounting pursuant to
The Commissioner‘s change of accounting method in 2003 was not arbitrary, particularly in light of the discretion granted to the Commissioner under
By initially electing to use the installment method in 2002, Mingo would have had no reason to believe that she had escaped taxation on the $126,240 gained from the unrealized receivables. See Graff Chevrolet Co. v. Campbell, 343 F.2d 568, 572 (5th Cir. 1965) (“When a taxpayer uses an accounting method which reflects an expense before it is proper to do so or which defers an item of income that should be reported currently, he has not succeeded (and does not purport to have succeeded) in permanently avoiding the reporting of any income; he has impliedly promised to report that income at a later date, when his accounting method, improper though it may be, would require it.“). Instead, she had merely deferred taxation on the unrealized receivables until 2007. The Commissioner did not abuse his discretion by forcing Mingo to report the amount as taxable income in 2003 as opposed to 2007 in light of the Commissioner‘s correct determination that Mingo‘s use of the installment method was improper.
Section 481(a)(2) Adjustments Following a Change of Accounting Method
Following a change of accounting method, the Commissioner may make any necessary adjustments to prevent taxable income from being duplicated or omitted as a result of the change under
Mingo‘s contention is founded upon a misunderstanding of the phrase “any taxable year to which this section does not apply.” See
In Graff, this Circuit explained the absence of a statute of limitations for
The statute of limitations is directed toward stale claims. Section 481 deals with claims which do not even arise until the year of the accounting change.... Section 481, therefore, does not hold the taxpayer to any income which he has any reason to believe he has avoided, and does not frustrate the policy that men should be able, after a certain time, to be confident that past wrongs are set at rest. Section 481 is designed to prevent a distortion of taxable income and a windfall to the taxpayer stemming from a change in accounting at a time when the statute of limitations bars reopening the taxpayer‘s returns for earlier years.... The Commissioner has ample power to change accounting methods and reassess income for open years; section 481 would be virtually useless if it did not affect closed years.
Id. at 572. Thus, the Commissioner properly utilized his authority under
In light of the foregoing, we AFFIRM the district court‘s judgment in favor of the Commissioner.