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UNITED STATES v. SAM ELLIS STORES

April 30, 1991

UNITED STATES OF AMERICA, Plaintiff,
v.
SAM ELLIS STORES, INC., Defendant



The opinion of the court was delivered by: GILLIAM

 EARL B. GILLIAM, UNITED STATES DISTRICT JUDGE

 The defendant's motion for reasonable litigation costs came on for hearing April 1, 1991 at 10:30 a.m. before the Honorable Earl B. Gilliam, District Judge. Greg Addington appeared on behalf of the United States. J. Clancy Wilson appeared on behalf of the defendant. At that time, the defendant's motion for reasonable litigation costs was taken under submission.

 Having considered all pleadings, declarations and the written and oral arguments of counsel and law in support thereof, the court hereby grants the defendant's motion for reasonable litigation costs.

 FACTS

 The defendant operates a retail store in Calexico, California, near the Mexican border. A large part of the business is conducted in pesos. The United States brought suit to recover a refund of taxes as a result of losses reported on the defendant's federal income tax return for the year ending June, 1983. The loss, $ 441,330, was allegedly due to the sale of merchandise in pesos and the declining value of the peso during 1983.

 The Government's complaint stated that the loss was a purported loss, and the defendant was not entitled to loss deductions in the amount of $ 441,300. The interrogatories, the Internal Revenue Service ("I.R.S.") auditor, and the Government's Memorandum of Facts and Contentions of Law focused on the amount of the losses, and raised no questions regarding the character of the loss. The Government claimed that the loss declared by the defendant was illusory since there was a constant turnover of pesos and dollars in the business.

 The parties conferred and agreed to the terms of a Pre-Trial Order signed by both parties on July 24, 1990. The order defined the following issues to be litigated:

 
1. Did Sam Ellis Stores, Inc. incur a deductible Mexican currency devaluation loss during the fiscal year ending June 30, 1983?
 
2. If issue number one is answered in the affirmative, what is the amount of the Mexican currency devaluation loss?
 
3. If issue number [two] is answered with an amount less than $ 441,330, what is the correct amount of the refund which should have been due Sam Ellis Stores, Inc. as a result of the net operating loss incurred in 1983?

 Settlement seemed likely as of the August 16, 1990, status conference before The Honorable William P. Copple. On August 21, 1990, the court and the defendant were advised by the Government's attorney that the case could not be settled. The defendant's counsel was advised that the principal issue would not be the amount of the loss, but whether that loss could be characterized as capital gains or ordinary loss. Capital losses can only be offset against capital gains. Since the defendant allegedly had no capital gains in 1983, there would be no offset if the losses were so characterized.

 The court limited the triable issues to the amount of the Mexican peso devaluation loss and excluded from further consideration the alternative position that the claimed devaluation loss was non-deductible. Following this ruling, the Government decided to voluntarily dismiss this action. The ...


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