Question

6. Read, summarize the facts, and explain the legal decision in DeGuzman v U.S., 147 F.Supp.2d.274 (2001)

Answer 1

The material facts as set forth in this opinion are uncontested. Plaintiffs filed joint tax returns with the IRS for years 1994 and 1995. (See Stip. ¶ 2.) In 1994, Plaintiff Mr. DeGuzman reported no taxable income while Plaintiff Mrs. DeGuzman reported a taxable income of $351,613 earned from her medical practice ($200,000 in taxable wages and $151,613 from Plaintiffs' wholly owned S Corporation "Daisy DeGuzman, M.D., P.A.") (See Stip. ¶¶ 11, 68.) Furthermore, Plaintiffs claimed $53,174 in income tax deductions on account of real estate losses sustained in 1994. (See Stip. ¶ 3.) In 1995, Plaintiff Mr. DeGuzman reported no taxable income while Plaintiff Mrs. DeGuzman reported a taxable income of $380,352 earned from her medical practice ($300,000 in taxable wages and $80,352 from Plaintiffs' wholly owned S Corporation "Daisy DeGuzman, M.D., P.A.") (See Stip. ¶¶ 12, 68.) Plaintiffs claimed $44,546 in income tax deductions on account of real estate losses sustained in 1995. (See Stip. ¶ 4.)

*276 The IRS refused to recognize Plaintiffs' claimed income tax deductions of $53,174 for 1994 and $44,546 for 1995. (See Stip. ¶ 5.) The IRS determined that such deductions were improper pursuant to 26 U.S.C. § 469. Under this section of the Internal Revenue Code ("IRC"), taxpayers are forbidden from deducting any losses they have incurred from "passive activities" (i.e., rental activities or trade or business activities) in which the taxpayers did not materially participate. The IRS alleged that such deductions claimed by Plaintiffs were being made to "shelter" the substantial income that Plaintiff Mrs. DeGuzman earned from her medical practice for years 1994 and 1995. (See Def. Brief 1.)

Plaintiffs brought suit against the United States contesting the IRS's refusal to recognize the deductions involving the losses they suffered in 1994 and 1995 from their real estate holdings. (See Stip. ¶ 6.)

It is necessary at this point to illustrate the real property holdings involved in this case before addressing the merits of Defendant's motion for summary judgment.

During the principal years of 1994 and 1995, Plaintiffs were the owners of numerous real estate properties. The properties relevant for purposes of this motion can be categorized into two distinct groups: properties leased to third parties and properties not leased to third parties. Properties owned by Plaintiffs and leased to third parties include: (1.) a suite in Orlando, Fla.; (2.) a townhouse in Staten Island, NY; (3.) a house in Bloomfield, NJ; (4.) an apartment in Jersey City, NJ; (5.) two condominium units in Roselle, NJ; and (6.) a condominium unit in Atlantic City, NJ. Properties owned by Plaintiffs and not leased to third parties include: (1.) an office condominium in Newark, NJ used by Plaintiff Mrs. DeGuzman for her medical practice; (2.) a vacant bank in East Orange, NJ; and (3.) an undeveloped lot in West Caldwell, NJ. Aside from the aforementioned properties, Plaintiff Mrs. DeGuzman also leased an office space in Newark, NJ as a second medical office.

During 1994 and 1995, Plaintiff Mr. DeGuzman, a licensed real estate agent, was solely responsible for managing the finances and maintenance of all these real estate properties. (See Stip. ¶ 67.) Plaintiff Mrs. DeGuzman did not manage any of these properties because of the extensive hours she spent practicing medicine. In addition, she never visited the leased real estate properties during 1994 and 1995. (See Stip. ¶¶ 13-16.) Although the parties do not contest the amount of time spent and nature of work performed by Plaintiff Mr. DeGuzman on each property, a detailed account of the time and effort devoted to each property is required for the Court's analysis.[1]

Judgement Summary

The standard for granting summary judgment pursuant to Fed.R.Civ.P. 56 is a *279 stringent one. Summary judgment is appropriate only if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); Hersh v. Allen Prods. Co., 789 F.2d 230, 232 (3d Cir. 1986); Lang v. New York Life Ins. Co., 721 F.2d 118, 119 (3d Cir.1983). Substantive law controls the inquiry into which facts are "material." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986).

All facts and inferences must be construed in the light most favorable to the non-moving party. See Peters v. Delaware River Port Auth. of Pa. and N.J., 16 F.3d 1346, 1349 (3d Cir.1994). Likewise, the court must resolve all reasonable doubts in favor of the nonmoving party when determining whether any genuine issues of material fact exist. Meyer v. Riegel Prods. Corp., 720 F.2d 303, 307, n. 2 (3d Cir.1983); Smith v. Pittsburgh Gage & Supply Co., 464 F.2d 870, 874 (3d Cir.1972).

It is important to note that "at the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249, 106 S. Ct. at 2511.

Under the standards announced by the Supreme Court's trilogy in Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986), Anderson, 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986), and Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986), "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment." Anderson, 477 U.S. at 247-48, 106 S. Ct. at 2510 (emphasis in original). If the moving party has made a properly supported motion for summary judgment, then the nonmoving party must come forward with specific facts to show that there is a genuine issue of material fact for trial. Id. at 248, 106 S. Ct. 2505. Thus, once the moving party has carried its burden of establishing the absence of genuine issues of material fact, the nonmoving party "may not rest upon the mere allegations or denials" of its pleadings, but must produce sufficient evidence that will reasonably support a jury verdict in its favor, Id. at 248-49, 106 S. Ct. 2505; J.E. Mamiye & Sons, Inc. v. Fidelity Bank, 813 F.2d 610, 618 (3d Cir.1987) (Becker, J., concurring), and not just "some metaphysical doubt as to material facts." Matsushita, 475 U.S. at 586, 106 S. Ct. at 1356.

Moreover, "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. If the evidence is merely colorable or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50, 106 S. Ct. at 2511. "Consequently, the court must ask whether, on the summary judgment record, reasonable jurors could find facts that demonstrated, by a preponderance of the evidence, that the nonmoving party is entitled to a verdict." In re Paoli R.R. Yard PCB Litig., 916 F.2d 829, 860 (3d Cir.1990).

On the other hand, summary judgment will not be granted if the dispute over a material fact is "genuine," that is, if a reasonable jury could decide the issue in the non-movant's favor. Anderson, 477 U.S. at 248, 106 S. Ct. at 2505. Thus, "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Id.; accord Ridgewood Bd. of Educ. v. N.E. ex rel. *280 M.E., 172 F.3d 238, 252 (3d Cir.1999) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986)).