The opinion of the court was delivered by: ALFRED J. LECHNER, JR.
This is an action by plaintiffs Joseph F. Naporano ("Joseph Naporano"), Marcia Naporano, Andrew J. Naporano, Jr. ("Andrew Naporano") and Sharon Naporano (collectively, the "Taxpayers") against defendant United States of America (the "Government") to recover deficiencies assessed to and collected from the Taxpayers by the Internal Revenue Service (the "IRS") for the taxable years 1987 and 1988. A complaint (the "Complaint") was filed on 12 January 1993.
Jurisdiction is alleged pursuant to 28 U.S.C. § 1346(a)(1).
Currently before the court are the cross motions for summary judgment of the Taxpayers and of the Government.
For the reasons set forth below, the motion of the Government for summary judgment is granted; the motion of the Taxpayers for summary judgment is denied.
Joseph Naporano and Andrew Naporano are the sole shareholders of two subchapter S corporations,
Naporano Iron & Metal Co. ("Naporano Iron & Metal") and Nimco Shredding Co. ("Nimco Shredding"). 12G Statement, P 1. In 1987 and 1988, both Naporano Iron & Metal and Nimco Shredding received dividends (the "NFS Dividends") from Naporano Foreign Sales Corp. ("Naporano Foreign Sales"). The parties agree Naporano Foreign Sales qualifies as a "foreign sales corporation" within the meaning of the Code.
Id., P 3.
In computing their incomes for 1987 and 1988, Naporano Iron & Metal and Nimco Shredding each deducted the NFS Dividends. 12G Statement, P 2. They took the deductions based on their interpretation of section 245(c)(1)(A) of the Code. Section 245(c)(1)(A) allows shareholders of an FSC which are domestic corporations to deduct dividends received from a FSC. 26 U.S.C. § 245(c)(1)(A).
Joseph Naporano and Andrew Naporano each filed a joint return with his spouse for the taxable years 1987 and 1988 which included his pro rata share of the income of Naporano Iron & Metal and Nimco Shredding. Complaint, PP 5, 7, 25 and 27. The shareholders of S Corporations determine their pro rata share of the S Corporation income from the informational returns and are required to include that amount as taxable income on their individual tax returns. Id. § 1363(b). Accordingly, Joseph Naporano and Andrew Naporano would have determined their pro rata share of S Corporation income from the informational returns filed by Naporano Iron & Metal and Nimco Shredding for 1987 and 1988. Because the NFS Dividends were not reported on the informational returns, Joseph Naporano and Andrew Naporano did not include the NFS Dividends in the calculation of their pro rata share of the incoine from the Naporano Iron & Metal and Nimco Shredding. The NFS dividends, therefore, were not reported by the Taxpayers as taxable income on their returns for 1987 and 1988. As a result, no federal income taxes were paid on the NFS Dividends.
Pursuant to an audit, see Complaint, P 19, the IRS disallowed the section 245(c)(1)(A) deductions taken by Naporano Iron & Metal and Nimco shredding. 12G Statement, P 4. As a result, the incomes of Naporano Iron & Metal and Nimco Shredding were recalculated to include the NFS Dividends. Id. Under the accounting rules for S Corporations, this additional income was passed through to the Taxpayers as the shareholders of Naporano Iron & Metal and Nimco Shredding. Id. As a result of the IRS disallowance and the consequential pass-through of additional income, the IRS assessed the Taxpayers with income tax deficiencies for the taxable years 1987 and 1988. Id., P 5. Joseph Naporano was assessed a deficiency of $ 380,401 for 1987 and $ 1,211,682 for 1988. Id. Andrew Naporano was assessed a deficiency of $ 205,518 for 1987 and $ 645,793 for 1988. Id.
On or about 29 January 1992, the Taxpayers paid the IRS the full amount of assessed taxes. Id., P 6. The Taxpayers also made timely claims for a tax refund, but the IRS did not process those claims. Id. After more than six months had elapsed without any action taken by the IRS on their refund claims, the Taxpayers commenced the present action on 21 January 1993. Id.
The parties cross move for summary judgment pursuant to Fed. R. Civ. P. 56 because of an asserted absence of any genuine issues of material facts. Government Brief at 1-2; Taxpayers Brief at 1. The Taxpayers contend they are entitled to a tax refund for amounts paid to the IRS after the IRS disallowed the section 245(c)(1)(A) deductions taken on their 1987 and 1988 tax returns. The Government contends provisions of the Code clearly proscribe the deductions taken by the Taxpayers.
A. Summary Judgment Standard of Review
To prevail on a motion for summary judgment, the moving party must establish "there is no genuine issue as to any material fact and that [it] is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The present task is to determine whether disputed issues of fact exist, but a district court may not resolve factual disputes in a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986); see also Desvi, Inc. v. Continental Ins. Co., 968 F.2d 307, 308 (3d Cir. 1992) ("threshold inquiry is whether there are 'genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party"') (citations omitted); Gray v. York Newspapers, Inc., 957 F.2d 1070, 1078 (3d Cir. 1992) ("We apply the test . . . (1) Is there no genuine issue of material fact and (2) is one party entitled to judgment as a matter of law?") (quotations omitted); Hackman v. Valley Fair, 932 F.2d 239, 241 (3d Cir. 1991) ("summary judgment is inappropriate when a conflict of a material fact is present in the record"); Nathanson v. Medical College of Pennsylvania, 926 F.2d 1368, 1380 (3d Cir. 1991) (summary judgment may not be granted "if there is a disagreement over what inferences can be reasonably drawn from the facts even if the facts are undisputed").
All evidence submitted must be viewed in a light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986); Williams v. New Castle County, 970 F.2d 1260, 1264 (3d Cir. 1992); Boyle v. Governor's Veterans Outreach & Assistance Center, 925 F.2d 71, 75 (3d Cir. 1991); Weldon v. Kraft, Inc., 896 F.2d 793, 797 (3d Cir. 1990); Todaro v. Bowman, 872 F.2d 43, 46 (3d Cir. 1989). "Any 'unexplained gaps' in materials submitted by the moving party, if pertinent to material issues of fact, justify denial of a motion for summary judgment." Ingersoll-Rand Fin. Corp. v. Anderson, 921 F.2d 497, 502 (3d Cir. 1990) (quoting O'Donnell v. United States, 891 F.2d 1079, 1082 (3d Cir. 1989)).
Although the summary judgment hurdle is a difficult one to overcome, it is by no means insurmountable. As the Supreme Court has stated, once the party seeking summary judgment has pointed out to the court the absence of a genuine issue of material fact,
its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. In the language of the Rule, the nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no "genuine issue for trial."
Matsushita, 475 U.S. at 586-87 (emphasis in original, citations and footnotes omitted). In other words, the inquiry involves determining "'whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.'" Brown v. Grabowski, 922 F.2d 1097, 1111 (3d Cir. 1990) (quoting Anderson, 477 U.S. at 251-52), cert. denied sub nom., Roselle v. Brown, 115 L. Ed. 2d 997, 111 S. Ct. 2827 (1991); see also Gray, 957 F.2d at 1078 ("there is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party").
The Supreme Court elaborated on the summary judgment standard in Anderson: "If the evidence [submitted by a party opposing summary judgment] is merely colorable, or is not significantly probative, summary judgment may be granted." 477 U.S. at 249-50 (citations omitted). The Supreme Court went on to note in Celotex Corp. v. Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986): "One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and we think it should be interpreted in a way that allows it to accomplish this purpose." Id. at 323-24 (footnote omitted); see also Carlson v. Arnot-Ogden Memorial Hosp., 918 F.2d 411, 413 (3d Cir. 1990) ("nonmoving party must adduce more than a mere scintilla of evidence in its favor"); Maguire v. Hughes Aircraft Corp., 912 F.2d 67, 72 (3d Cir. 1990) (non-moving party may not rest upon mere allegations); Schoch v. First Fidelity Bancorporation, 912 F.2d 654, 657 (3d Cir. 1990) (neither unsupported allegations in pleadings and memoranda of law nor conclusory allegations in affidavits will establish genuine issue of material fact); Aronow Roofing Co. v. Gilbane Building Co., 902 F.2d 1127, 1128 (3d Cir. 1990) ("summary judgment will be granted where the non-moving party fails to 'establish the existence' of an element essential to the case").
The dispute between the parties in the present case rests on conflicting interpretations of the Code and of the IRS policy regarding S Corporations and dividends-received deductions
under section 245(c)(1)(A). Because the parties agree on the facts relevant to this dispute, see 12G Statement, the case is a particularly appropriate candidate for summary judgment analysis.
See Continental Ins. Co. v. Bodie, 682 F.2d 436, 439 (3d Cir. 1982); Armco Inc. v. Glenfed Fin. Corp., 720 F. Supp. 1129, 1132 (D.N.J. 1989); United States v. 294 Various Gambling Devices, 718 F. Supp. 1236, 1242 (W.D.Pa. 1989); see also Gans v. Mundy, 762 F.2d 338, 341 (3d Cir.) ("summary judgment proper where facts are undisputed"), cert. denied, 474 U.S. 1010, 88 L. Ed. 2d 467, 106 S. Ct. 537 (1985); Peterson v. Lehigh Valley Dist. Council, United Bhd. of Carpenters & Joiners, 676 F.2d 81, 84 (3d Cir. 1982) ("summary judgment is a useful procedure when there is no dispute about critical facts and it serves to eliminate expense and delay of unnecessary trials"); Crain v. Board of Police Comm'rs ...