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Wicks v. United States

United States District Court, N.D. Oklahoma

January 22, 2018

PAUL F. WICKS and ELENA A. WICKS, Plaintiffs,



         This is an action for a tax refund. Plaintiffs Paul. F. Wicks and Elena A. Wicks and defendant United States of America on behalf of the Internal Revenue Service (IRS) dispute whether it was lawful for plaintiffs to claim losses from their cattle ranching activity on their 2010 and 2011 federal income tax returns. Before the Court is defendant's motion for summary judgment (Dkt. # 29), which presents two questions: in tax years 2010 and 2011, were plaintiffs, under the nine factor, objective test enumerated in Treas. Reg. § 1.183-2(b), engaged in their cattle ranching activity for profit? And, if not, are they liable for the accuracy-related penalty that the IRS imposed on them pursuant to 26 U.S.C. § 662? Also before the Court are plaintiffs' motion to strike evidence (Dkt. # 36) and defendant's motion to exclude the report and testimony of plaintiffs' expert (Dkt. # 45).

         I. Background

         The following facts are undisputed: plaintiff Paul Wicks (Wicks) owns Wicks and Associates Industrial Services, LLC (Wicks and Associates), a highly profitable, twenty-year-old Tulsa company that provides mechanical inspection services for major oil refineries and gas plants. Dkt. # 29-6, at 4, 49.[1] As the owner of Wicks and Associates, Wicks manages all of the company's supervisors and spends anywhere from ten to fifty hours a week doing so. Id. at 49-50. He has an associate's degree in applied science and has obtained several certifications from the American Petroleum Institute. Id. at 5. Wicks and Associates has anywhere from thirty to eighty employees, including an individual with an accounting degree who handles payroll, invoicing, deposits, and taxes. Id. at 50. The company maintains a corporate bank account and uses QuickBooks accounting software. Id. at 41, 68. According to Wicks, one of the reasons his company is so profitable is because his team operates “extremely efficiently.” Id. at 51.

         Since 2006, Wicks has reported $9, 926, 304 in adjusted gross income on his tax returns, an average of $992, 630 per year. Dkt. # 29-2, at 30-191; Dkt. # 29-3, at 1-83.[2] In 2010 and 2011, Wicks's net worth was approximately $3, 000, 000. Id. at 85. Currently, Wicks has $2 to $3 million in savings and a net worth of approximately $7 million. Dkt. # 29-6, at 60-61.

         In addition to his work at Wicks and Associates, Wicks built and maintains a cattle ranch-of which he is the sole owner and operator-in Nowata County, Oklahoma. Dkt. # 29-6, at 24. According to Wicks, he ventured into cattle ranching to “make a profit.” Dkt. # 29-6, at 25. Every year since 1997 (when he began cattle ranching), however, he has claimed the following losses from cattle ranching as business deductions on his federal income tax returns, totaling $807, 380:

Gross Receipts




$ -

$ 10, 459.00

$ (10, 459.00)


$ -

$ 9, 547.00

$ (9, 547.00)


$ 637.00

$ 25, 027.00

$ (24, 390.00)


$ -

$ 18, 182.00

$ (18, 182.00)


$ -

$ 31, 028.00

$ (31, 028.00)


$ -

$ 31, 701.00

$ (31, 701.00)


$ 159.00

$ 41, 806.00

$ (41, 647.00)


$ 159.00

$ 83, 283.00

$ (83, 124.00)


$ 2, 026.00

$ 37, 751.00

$ (35, 725.00)


$ 3, 302.00

$ 44, 444.00

$ (41, 142.00)


$ 7, 659.00

$ 23, 800.00

$ (16, 141.00)


$ 1, 934.00

$ 34, 575.00

$ (32, 641.00)


$ 155.00

$ 42, 954.00

$ (42, 799.00)


$ 155.00

$ 49, 133.00

$ (48, 978.00)


$ -

$ 103, 706.00

$ (103, 706.00)


$ 159.00

$ 50, 470.00

$ (50, 311.00)


$ 16, 257.00

$ 61, 576.00

$ (45, 319.00)


$ -

$ 58, 067.00

$ (58, 067.00)


$ -

$ 82, 473.00

$ (82, 473.00)

$ 32, 602.00

$ 839, 982.00

$ (807, 380.00)

         Dkt. # 29-2, at 30-191; Dkt. # 29-3, at 1-83; Dkt. # 29-4, 1-9; Dkt. # 29-6, at 57. Since 2006, Wicks has presumably saved thousands of dollars of income tax by reporting his losses from cattle activity. Dkt. # 29-5, at 8.[3]

         In building and maintaining his cattle ranch, Wicks has not: written a business plan or financial projections (Dkt. # 29-3, at 188);[4] used QuickBooks or any other accounting software (id. at 190); created a separate bank account (Dkt. # 29-6, at 43); executed any written contracts (Dkt. # 29-3, at 190); formed a business entity (Dkt. # 29-6, at 44); marketed or promoted his cattle operation (id. at 68); insured his cattle against catastrophic loss (id. at 35-36);[5] or consulted a financial advisor (id. at 26). And before starting his ranch in 1997, Wicks's only experience with cattle was “feeding [and] working” them as a child. Id. at 25.

         On the other hand, in building and maintaining his cattle ranch, Wicks has done the following:

• In 1997, purchased eighty acres of land with a dilapidated barn and unusable fence and repaired these features. Dkt. # 29-3, at 87;
• In 1998, purchased two longhorn heifers. Id.;
• In 2001, built a new barn. Id.;
• In 2002, bought an additional one hundred and eighty acres of land, adjacent to the original eighty acres, to increase his cattle herd and “the potential profitability from [his] cattle activities.” Id. This land had nothing on it except an unusable fence and small pond. Id;
• From 2002 to 2006, improved the one hundred and eighty acres by: replacing the fence, enlarging the pond to hold more water, installing rural water so cattle could be watered during drought conditions and when the pond froze, building a “cattle working facility” (which immobilizes the cattle for purposes including vaccination) and “loafing shed” (to shelter the cattle) and consulting with a successful local rancher, Pat Faulkner, regarding profitable methods of cattle ranching. Id. at 87-88; Dkt # 35-1, at 1;
• In 2006, purchased twenty cows, ten of which were of the Simmental breed and ten of which were Charlois, to breed with his longhorn bull. Id. at 4-5. Based on advice from Faulkner and his own experience, Wicks sought to obtain cattle that were 1/2 Simmental, 1/4 Charolais, and 1/4 Longhorn because he believed this crossbreed would produce good milk and beef and possess characteristics that would allow them to thrive on his ranch. Id. at 7. Wicks was aware that obtaining such a crossbreed would take a minimum of four years. Id.;
• In 2010 and 2011, built four new loafing sheds (in response to several calves dying from pneumonia in 2009) and purchased hay bailing equipment and feed bins to reduce the cost of purchasing feed and bailing hay. Dkt. # 29-3, at 88-89;
• By 2012, amassed a total of 128 cattle. Dkt # 29-6, at 35;
• In 2013, sold eighteen cattle for $16, 256.25. Dkt. # 29-3, at 88. Although Wicks's crossbred calves were “weaned and ready for sale” in the fall of 2011, cattle prices were depressed due to drought. Id. Accordingly, Wicks decided to increase his herd that and waited to sell until 2013, when cattle prices had rebounded. Id.;
• Over the years, attended seminars on topics including breeding and pasture management offered through Oklahoma State University at the Nowata County Extension office. Dkt. # 35-1, at 2-3. In addition, read “everything” on the Oklahoma State Extension office website about raising cattle and joined the Oklahoma Cattlemen's Association and the Texas and Southwest Cattlemen's Association. Id. at 10-11; and
• Maintained spreadsheets listing expenses he incurred from his cattle ranching activity. Dkt. # 35-8.

         Additionally, Wicks has performed the labor required to build and maintain his ranch almost entirely on his own (with occasional help from a friend). Dkt. # 29-3, at 84. He spends, on average, three to four days per week at his ranch (Friday through Sunday and sometimes Wednesday). Dkt. # 29-6, at 22. Wicks originally purchased the tracts of land for a total of $175, 000 and, in 2014, his ranch was appraised at $725, 000. Dkt. # 35-6.[6]

         On or about October 27, 2014, upon denying plaintiffs' 2010 and 2011 business deductions for losses from their cattle ranching and horse racing activities, the IRS assessed against plaintiffs additional taxes in the amounts of $24, 621 for 2010 and $44, 214 for 2011. Dkt. #2-2. In addition, for those years, the IRS imposed accuracy-related penalties in the amounts of $4, 924.20 and $8, 842.80 respectively. Id. Plaintiffs paid these amounts in full, plus interest. Id.

         On August 29, 2015, however, plaintiffs filed a refund claim for these amounts with the IRS, but the agency has taken no action on this claim. Dkt. # 2. On October 13, 2016 plaintiffs filed this lawsuit, demanding, under 26 U.S.C. § 7422, a tax refund in the amount of $89, 838.09 for the taxes and penalties the IRS assessed against them upon denying their 2010 and 2011 business deductions from their horse racing and cattle ranching activities. Dkt. # 2, at 3. At plaintiffs' request, the Court has dismissed their refund claim related to horse racing (Dkt. # 34).[7] But plaintiffs maintain that they are entitled to a refund for the taxes and penalties the IRS assessed against them for claiming losses from their cattle activity in 2010 and 2011, since, during these years, Wicks was engaged in cattle ranching “for profit, ” as that term is defined by Treas. Reg. § 1.183-2(b). Dkt. # 35, at 15. Defendant now moves for summary judgment on plaintiffs' remaining claim (Dkt. # 30).

         II. Standard of Review

         Summary judgment pursuant to Fed.R.Civ.P. 56 is appropriate where there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); Kendall v. Watkins, 998 F.2d 848, 850 (10th Cir. 1993). The plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. Celotex, 477 U.S. at 317. “Summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed ‘to secure the just, speedy and inexpensive determination of every action.'” Id. at 327.

         “When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts . . . . 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 Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (citations omitted). “The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the [trier of fact] could reasonably find for the plaintiff.” Anderson, 477 U.S. at 252. In essence, the inquiry for the Court is “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.” Id. at 250. In its review, the Court construes the record in the light most favorable to the party opposing summary judgment. Garratt v. Walker, 164 F.3d 1249, 1251 (10th Cir. 1998).

         III. Evidentiary Issues

         Before deciding defendant's motion for summary judgment, the Court must resolve three evidentiary issues: (1) plaintiffs' motion to strike evidence pertaining to tax year 2012 or any subsequent year (Dkt. # 36); (2) the question, raised by defendant in its response to plaintiffs' statement of additional material facts, Dkt. # 39-1, of whether the Court will consider on summary judgment any of the averments in Wicks's affidavit (which was submitted in response to defendant's motion for summary judgment); and (3) defendant's motion to exclude the report and testimony of plaintiffs' expert (Dkt. # 45).

         i. Plaintiffs' Motion to Strike

         Plaintiff moves to strike “all purported facts or evidence pertaining to tax year 2012 and any subsequent year, as such matters are not relevant to Plaintiffs' income tax deductions for tax years 2010 and 2011.” Dkt. # 36, at 1. But plaintiff neither offers a reason as to why such evidence is irrelevant nor presents any authority indicating that it is inappropriate for a court to consider evidence pertaining to subsequent tax years in an action for a tax refund. And defendant, by contrast, cites several cases from the United States Tax Court stating that “[e]vidence from years after the years in issue is relevant to the extent it creates inferences regarding the taxpayer's requisite profit objective in earlier years.” Dkt. # 38, at 3 (quoting Dodds v. Comm'r, 105 T.C.M. (CCH) 1472, at *11 (2013)); see also Knudsen v. Comm'r, 94 T.C.M. (CCH) 461, at *9 (2007) (“. . . profits or losses . . . in subsequent years have probative, although not determinative, significance in [determining the existence of a profit motive in the earlier years].”) (quotation omitted).

         Accordingly, the Court will consider as part of the summary judgment record evidence pertaining to tax year 2012 and any subsequent year, if such evidence creates an inference regarding Wicks's profit motive (or lack thereof) in cattle ranching in 2010 and 2011 and is otherwise admissible under the Federal Rules of Evidence. Plaintiff's motion to strike (Dkt. # 36) is therefore denied.

         ii. Wicks's Affidavit

         In response to defendant's motion for summary judgment, plaintiffs submitted an affidavit containing factual averments that Wicks had not made in any prior filings or testimony. Dkt. # 35-5. This affidavit is substantially similar to the narrative statement Wicks provided in his response to defendant's interrogatories, except that it contains several statements that Wicks did not express in his narrative response to defendant's interrogatories or at his deposition. Compare id., with Dkt. # 29-3, at 87-89; Dkt. # 29-6. In its response to plaintiffs' statement of additional material facts, defendant argues that the Court should exclude the new averments in Wicks's affidavit because he cannot, at this late stage in the litigation, inject new factual assertions merely to defeat defendant's motion for summary judgment.

         An affidavit may not be disregarded solely “because it conflicts with the affiant's prior sworn statements.” Franks v. Nimmo, 796 F.2d 1230, 1237 (1986) (citations omitted). “In assessing a conflict under these circumstances, however, courts will disregard a contrary affidavit when they conclude that it constitutes an attempt to create a sham fact issue.” Id. “Factors relevant to the existence of a sham fact issue include whether the affiant was cross-examined during his earlier testimony, whether the affiant had access to the pertinent evidence at the time of his earlier testimony or whether the affidavit was based on newly discovered evidence, and whether the earlier testimony reflects confusion which the affidavit attempts to explain.” Id.

         Wicks was cross-examined at his deposition and none of the factual averments in his affidavit is based on newly discovered evidence. Dkt. # 29-3, at 87-89; Dkt. # 29-6. The Court, therefore, will exclude from the summary judgment record any assertions in Wicks's affidavit that contradict his prior statements, serve no clarifying purpose, and appear to have been tailored to defeat defendant's motion for summary judgment.

         The material factual averments in Wicks's affidavit that defendant argues the Court should exclude from the summary judgment record, and the Court's findings as to whether ...

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