Gudmundsson v. U.S.
| Decision Date | 26 October 2009 |
| Docket Number | No. 08-CV-6131L.,08-CV-6131L. |
| Citation | 665 F.Supp.2d 227 |
| Parties | Olafur GUDMUNDSSON, Sally A. Rudrud, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Western District of New York |
Arnold R. Petralia, Petralia, Webb & O'Connell, P.C., Rochester, NY, for Plaintiff.
Stephen T. Lyons, U.S. Department of Justice, Washington, DC, for Defendant.
DECISION AND ORDER
Plaintiffs, Olafur Gudmundsson and Sally Rudrud, commenced this action on March 21, 2008, against the United States of America ("Government"), seeking a refund of roughly $300,000 in income taxes that they paid for the calendar year 1999. The Court has jurisdiction over this action under 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422. See Gulden v. United States, 287 Fed.Appx. 813, 817 (11th Cir.2008); Field v. United States, 328 F.3d 58, 59 (2d Cir. 2003).
Both sides have moved for summary judgment. For the reasons that follow, plaintiffs' motion is denied, the Government's motion is granted, and the complaint is dismissed.
The relevant facts are not in dispute, and are set forth in a joint stipulation of material facts ("Stip") entered into by the parties. Dkt. # 12-2. Although the sixteen-page stipulation recites a detailed series of facts involving various financial transactions and corporate decisions, the essential facts are fairly straightforward.
At all times relevant to this action, Gudmundsson was an officer of Aurora Foods, Inc. ("Aurora"). Aurora was part of a larger group of companies owned by a consortium of private investors.
As part of a plan of reorganization involving those various corporations, an initial public offering ("IPO") of Aurora stock was made on July 1, 1998. Pursuant to Aurora's employee incentive compensation plan, and in conjunction with that IPO, at the time of the IPO Gudmundsson received the right to the distribution of 73,105 shares of Aurora stock. Stip. ¶¶ 15, 20; Stip. Ex. 6 (Dkt. # 12-12) at 10, § (c). The actual distribution of the stock would not occur until a year later, however, on July 1, 1999. Stip. ¶¶ 17, 25; Stip. Ex. 6 § 11.
Plaintiffs (who were married at the time but are now divorced) timely filed their 1999 federal income tax return on or before April 15, 2000. They reported wages of a little over $2 million, which included nearly $1.3 million in compensation from Aurora, based on the distribution to Gudmundsson of the Aurora stock. That amount was calculated by multiplying the number of shares that Gudmundsson received in the distribution, 73,105, by $17.685, which represented the average per-share price of Aurora stock on the New York Stock Exchange on July 1, 1999. Id. ¶ 27. Plaintiffs now claim that they were not required to report the full $1.3 million and, accordingly, seek a refund.
In late November 1999, Aurora announced that its earnings for the fourth quarter of that year would fall short of estimates. Following that announcement, Aurora's stock price fell over 26% from November 22 to November 24, 1999. Id. ¶ 21.
In February 2000, Aurora's auditors informed Aurora's audit committee that the auditors had discovered documents that raised some questions about Aurora's recent accounting practices. On February 11, Aurora's board of directors ("board") appointed a committee to investigate those practices. The first public disclosure of any potential accounting fraud at Aurora came on February 17, 2000, when the company announced that investigation. Id. ¶ 22.
On that same date, several members of Aurora's senior management, including its chairman and chief executive officer, and its vice chairman and chief financial officer, resigned. From February 17 to February 22, 2000, Aurora's stock price fell roughly 50%. Id.
In April 2000, Aurora announced that it was reducing its previously reported pre-tax earnings for the last half of 1998 and the first three quarters of 1999 by a total of over $81 million. In January 2001, the United States Attorney for the Southern District of New York announced indictments against the former Aurora officers who were allegedly responsible for the accounting improprieties, charging them with securities fraud and related charges. Those officers eventually entered guilty pleas in satisfaction of the charges against them. There is no allegation or evidence that Gudmundsson had any prior knowledge of the accounting fraud, and he was not charged with any wrongdoing.
On or before April 15, 2003, plaintiffs filed an amended tax return for 1999, claiming a refund of $301,834 plus interest. The refund claim was based on plaintiffs' assertion that the amount of wages to be included in their income for that year as a result of the Aurora stock distribution to Gudmundsson on July 1, 1999, should have been based on the $7.5625 per-share value of Aurora stock as of December 31, 1999, rather than the per-share value as of July 1, 1999, which they had used in their original 1999 tax return.
On April 3, 2006, the Internal Revenue Service disallowed plaintiffs' refund claim. Plaintiffs filed this action on March 21, 2008. The complaint asserts six causes of action, all of which are centered on plaintiffs' allegation that the income that they reported in their 1999 tax return, attributable to the July 1, 1999 stock distribution, was vastly overstated due to the fraudulent manipulation of Aurora's financial statements by its top officers.
Under 28 U.S.C. § 1346(a)(1), United States district courts have original jurisdiction over
[a]ny civil action against the United States for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws.
"In actions brought pursuant to this provision, a district court generally reviews the determination and assessment of the entire tax liability de novo, `plac[ing] itself in the shoes of the Commissioner' [of Internal Revenue]." Carione v. United States, 368 F.Supp.2d 186, 191-92 (E.D.N.Y.2005) (quoting R.E. Dietz Corp. v. United States, 939 F.2d 1, 4 (2d Cir. 1991)). The taxpayer bears the burden of proving that the tax assessment is erroneous. United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976).
To prevail, the taxpayer must first
present substantial evidence as to the wrongfulness of the Commissioner's determination to meet the burden of going forward. Even if this burden is met, the taxpayer still bears the burden of persuasion. Thus, a plaintiff must both come forward with enough evidence to support a finding contrary to the Commissioner's determination and then still carry the ultimate burden of proof.
Gourley v. United States, No. 08-558, 2009 WL 2700206, at *4 (Fed.Cl. Aug. 26, 2009) (citations and quotation marks omitted).
shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable.
26 U.S.C. § 83(a).
The terms "transferable" and "subject to a substantial risk of forfeiture" lie at the heart of the present dispute. Plaintiffs contend that the stock that was received by Gudmundsson on July 1, 1999 was either not transferable, or was subject to a substantial risk of forfeiture, for at least six months after that date, based on a number of theories, as will be explained later in this Decision and Order.
Section 83, and the relevant Securities Exchange Commission ("SEC") regulations, shed some light on the meaning of those terms. The regulations state that "whether a risk of forfeiture is substantial or not depends upon the facts and circumstances," and that a "substantial risk of forfeiture exists where rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is substantial if such condition is not satisfied." 26 C.F.R. § 1.83-3(c).
Section 83 also provides that "[t]he rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture." 26 U.S.C. § 83(c)(2). In other words, as explained in the regulations, "the rights of a person in property are transferable if such person can transfer any interest in the property to any person other than the transferor of the property, but only if the rights in such property of such transferee are not subject to a substantial risk of forfeiture." 26 C.F.R. § 1.83-3(d).
In addition, § 83 states that a person's rights in property are considered to be subject to a substantial risk of forfeiture, and not transferable, if "the sale of [such] property at a profit...
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