Banaitis v. C.I.R.
| Citation | 340 F.3d 1074 |
| Decision Date | 27 August 2003 |
| Docket Number | No. 02-70421.,02-70421. |
| Parties | Sigitas BANAITIS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Joseph Wetzel and Russell A. Sandor; Wetzel, DeFrang, & Sandor; and Philip N. Jones; Duffy Kekel LLP; Portland, Oregon; attorneys for the petitioner.
Eileen J. O'Connor, Richard Farber, and Kenneth Rosenberg, United States Department of Justice, Tax Division; Washington, D.C.; attorneys for the respondent.
Appeal from a Decision of the United States Tax Court. Tax Ct. No. 4323-00.
Before: Robert R. BEEZER, Sidney R. THOMAS, and Richard R. CLIFTON, Circuit Judges.
Sigitas Banaitis appeals the United States Tax Court's entry of judgment in favor of the Commissioner of Internal Revenue regarding a $1,708,216 deficiency in Banaitis' 1995 income tax. We affirm in part and reverse in part.
From 1980 until late 1987, Sigitas Banaitis, an Oregon resident, worked as a vice president and loan officer with the Bank of California. On behalf of the Bank of California, Banaitis developed grain-focused finance activity in Portland, Oregon, then the largest grain exporting port on the west coast. Banaitis had access to private information regarding the companies with which he worked. This private information included, among other things, data regarding these companies' comparative financial, inventory, and margin strengths, as well as information regarding their respective profitabilities. Much of this information was culled from confidential financial statements. To ensure the security of this information, Banaitis and the Bank of California executed confidentiality agreements.
Sometime in 1984, Mitsubishi Bank acquired a controlling interest in the Bank of California. Mitsubishi Group, Ltd., Mitsubishi Bank's parent company and then the largest company in the world, controlled and operated firms competing directly with a number of Banaitis' loan customers. Anticipating the potential conflict engendered by Mitsubishi Bank's acquisition of the Bank of California — namely, the potential exposure of sensitive financial information — many of Banaitis' customers contacted him, imploring Banaitis to keep the financial information with which he was entrusted confidential; indeed, some went so far as to request that their financial information be sequestered under lock and key.
Banaitis complied with his customers' wishes to keep this sensitive information confidential, refusing to disclose the data when asked to do so by employees of Mitsubishi Bank and the Bank of California. But Banaitis' refusal to disclose was apparently not well-received by Mitsubishi Bank or the Bank of California. Within months of Banaitis' action, Banaitis received an unfavorable performance review, a review that criticized Banaitis for inadequate business performance and accused him of dishonesty and improper employee conduct. Banaitis was placed on work probation.
Troubled by his employment situation, Banaitis apparently suffered a host of physical maladies; his symptoms included headaches, insomnia, gastrointestinal disorders, bleeding gums, and various orthopedic problems. By December 30, 1987, Banaitis' work situation had grown so intolerable that Banaitis left his job, a decision prompted by his employer's delivery of a letter stating that Banaitis had resigned and that he had only 30 minutes to clean out his desk. If Banaitis had been employed for one more day, his pension for 1987 would have vested for that year.
On November 15, 1989, Banaitis retained the law firm of Merten & Associates (hereinafter "Merten") to pursue legal action against Mitsubishi Bank and the Bank of California. To ratify his relationship with Merten, Banaitis signed a document titled "Contingent Fee Retainer Agreement (Statutory Attorneys Fees)." In general, the fee agreement provided for the payment of one-third of the gross settlement prior to commencement of a trial or arbitration and for forty percent of the gross recovery thereafter. Through this agreement, Merten was authorized to "accept a structured payment of the attorneys fee directly from the adverse party." Any award of statutory attorneys fees paid by the opposing parties would be credited toward the amount Banaitis owed Merten. The agreement also required Banaitis to approve the acceptance or rejection of any settlement offer, empowering Merten to terminate its representation of Banaitis if, generally stated, Banaitis behaved unreasonably as a client.
Less than a month after retaining Merten's services, Banaitis filed a lawsuit against Mitsubishi Bank and the Bank of California in the Multnomah County Circuit Court for the State of Oregon. In his fourth amended complaint, Banaitis brought two claims for relief seeking general and punitive damages, one claim against Mitsubishi Bank and the other against the Bank of California. Banaitis alleged that Mitsubishi Bank intentionally and willfully interfered with Banaitis' employment agreement and economic expectations and caused the Bank of California to discharge Banaitis. Banaitis alleged that Bank of California wrongfully discharged him and improperly attempted to force him to breach his fiduciary duty to his customers by appropriating trade secrets and other confidential information.
On February 25, 1991, the state court empaneled a jury to try Banaitis' case. Approximately three weeks later, the jury retired for deliberations, returning a special verdict within four hours, finding that:
• Banaitis did not voluntarily resign his position;
• Mitsubishi Bank, through "improper means or ... motive," caused the Bank of California to fire or to discharge Banaitis constructively;
• The Bank of California forced Banaitis to resign by making his working conditions unacceptable, doing so because Banaitis refused to give confidential information to Mitsubishi Bank;
• Banaitis' refusal to give confidential information reflected an "important public policy";
• As a result of the tortious acts, Banaitis suffered emotional distress and injury to reputation;
• Banaitis was entitled to a damage award of $196,389 for lost compensation, $450,000 for lost future compensation, "noneconomic" damages (i.e., damages attributable to his "emotional distress and/or injury to reputation") of $500,000 against Mitsubishi Bank and $125,000 against the Bank of California, and punitive damages of $3 million against Mitsubishi Bank and $2 million against the Bank of California;
• Mitsubishi Bank was 80% at fault for the damages with the Bank of California 20% at fault, but the defendants were jointly and severally liable for the economic damage award and severally liable for the noneconomic and punitive damages awarded.
Soon after the jury returned its special verdict, Mitsubishi Bank and the Bank of California filed a motion with the trial court for judgment notwithstanding the verdict. The trial court granted this motion in part, setting aside the punitive damage award against each defendant. Both parties subsequently sought review with the Oregon Court of Appeals.
Before proceeding with this appeal, Banaitis and Merten entered a second fee agreement to confirm the terms of their arrangement for costs and fees incurred during the course of appellate litigation. In general terms, the new fee agreement provided that Merton would be entitled to 50% of all payable compensatory damages and 42.9127263% of all payable punitive damages.
The Oregon Court of Appeals decided entirely in Banaitis' favor, affirming the award of compensatory damages and reversing the trial court's judgment notwithstanding the verdict to the extent that it erased the jury's punitive damage award. See Banaitis v. Mitsubishi Bank, Ltd., 129 Or.App. 371, 879 P.2d 1288 (1994). In response, Mitsubishi Bank and the Bank of California appealed to the Oregon Supreme Court. The Oregon Supreme Court initially granted review, see Banaitis v. Mitsubishi Bank, Ltd., 320 Or. 407, 887 P.2d 791 (1994), but, on August 24, 1995, the court dismissed this review as improvidently granted. See Banaitis v. Mitsubishi Bank, Ltd., 321 Or. 511, 900 P.2d 508 (1995) ().
Shortly thereafter, the parties entered into a confidential settlement agreement to resolve all pending disputes. As a part of this settlement agreement, Mitsubishi Bank and the Bank of California issued checks totaling $8,728,559, $3,864,012 of which the Bank of California paid, pursuant to the terms of the agreement, directly to Merten. Mitsubishi remitted the remaining $4,864,547 directly to Banaitis.1
Banaitis submitted a timely 1995 Federal income tax return as a married person filing separately. In his 1995 return, Banaitis reported a total income of $1,473,685, most of which constituted what Banaitis deemed "taxable interest"; in his return, importantly, Banaitis excluded from his gross income the full predicate $8,728,599 settlement total. To justify this gross income amount, Banaitis appended to his return "a disclosure statement ... explaining that the compensatory damages, the punitive damages, and the interest on the part of the award used to pay his attorney's fees were excludable from his gross income under section 104(a)(2)" of the Internal Revenue Code.
The Internal Revenue Service (hereinafter "the IRS" or "the Commissioner") disagreed with both the return as filed and the justifications set forth in Banaitis' explanatory "disclosure statement," delivering to Banaitis on March 24, 2000, a notice of deficiency regarding Banaitis' 1995 income tax payment. In pertinent part, the notice explained that the taxable proceeds of Banaitis' 1995 settlement with Mitsubishi and the Bank totaled $8,103,559, not the $1,421,420 that Banaitis reported; thus, Banaitis' taxable income grew by a measure of $6,682,130. Based on this...
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