Greiner v. United States, No. 13-520T

CourtCourt of Federal Claims
Writing for the CourtCAMPBELL-SMITH, Chief Judge
PartiesJEFFREY H. GREINER & KIM E. GREINER, Plaintiffs, v. THE UNITED STATES, Defendant.
Docket NumberNo. 13-520T
Decision Date30 June 2015


No. 13-520T

United States Court of Federal Claims

Re-issued for Publication: July 22, 20151
June 30, 2015

Tax Refund; Merger; Earn-out Right; Earn-out Payments; I.R.C. § 83; Closed Transaction; Burnet v. Logan; Open Transaction; I.R.C. § 446(e); Treas. Reg. § 1.446-1(e); Method of Accounting; I.R.C. § 481

Michael J. Desmond, Santa Barbara, CA, for plaintiffs.

S. Starling Marshall, Trial Attorney, Tax Division, with whom were Caroline D. Ciraolo, Acting Assistant Attorney General, David I. Pincus, Chief, Court of Federal Claims Section, and G. Robson Stewart, Assistant Chief, Court of Federal Claims Section, United States Department of Justice, Washington, D.C., for defendant.



Plaintiffs Jeffrey and Kim Greiner seek a refund of $4,742,703 in federal income taxes for the 2008 and 2009 tax years, plus interest and costs. Compl. ¶¶ 30, 34, ECF No. 1. This court's jurisdiction over their refund suit is not in dispute, see 28 U.S.C. § 1491(a)(1) (2012); 26 U.S.C. § 7422(a) (2012), and the fundamental issue in this refund suit, as in most, is whether the taxpayers can establish an overpayment of taxes in the years before the court, Lewis v. Reynolds, 284 U.S. 281, 283 ("An overpayment must appear before refund is authorized."), modified on other grounds, 284 U.S. 599 (1932);

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Fisher v. United States, 80 F.3d 1576, 1579-81 (Fed. Cir. 1996); Dysart v. United States, 340 F.2d 624, 628-29 (Ct. Cl. 1965).

The Greiners filed for summary judgment as to their alleged overpayment.2 Pls.' Mot. Summ. J., ECF No. 22; Pls.' Mem., ECF No. 22-1. The Greiners contend that their original 2008 and 2009 tax returns erroneously classified two cash payments received in those years as compensation income, taxable at ordinary income rates. Instead, as set forth in their 2008 and 2009 amended returns, the Greiners claim that these amounts were not compensation income, but rather capital gain from the sale or exchange of a capital asset and taxable at preferential long-term capital gain rates. The Greiners assert a right to refund based on the difference between the higher ordinary income tax they paid under their original returns, and the lower tax for capital gain allegedly owed under their amended returns.

The government opposes their motion and cross-moves for summary judgment raising three defenses.3 Def.'s Cross-Mot., ECF No. 25; Def.'s Mem., ECF No. 25-1. The parties acknowledge that if the government were to prevail on any one of these defenses, the Greiners' refund claims would be resolved without the court having to reach the merits of whether proper reporting reflects ordinary income or capital gain. See Order, Oct. 16, 2014, ECF No. 21. Therefore, in the interest of judicial economy and at the parties' urging, the court agreed to delay resolving the Greiners' dispositive motion in order first to consider the three "threshold" defenses raised in the government's dispositive motion. See id.

First, the government alleges that the Greiners' re-classification of payments from ordinary income to long-term capital gain in their amended 2008 and 2009 returns

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reflects a "change in method of accounting" for which permission was required but never obtained, in violation of § 446(e) of the Internal Revenue Code of 1986, as amended (I.R.C. or Code). Def.'s Mem. 2, 11-17. Second, the government contends that the change in accounting violates the common-law duty of consistency that the Greiners, as taxpayers, owe the Internal Revenue Service (IRS). Id. at 2, 17-20. Third, the government argues that the 2008 and 2009 payments cannot qualify as long-term capital gain, as alleged, because the payments did not result from the "sale or exchange" of a "capital asset" as those terms are defined in Code §§ 1221 and 1222. Id. at 2, 20-27.

The Greiners respond that the consent requirement imposed by I.R.C. § 446(e) was never triggered because the re-classification of ordinary income to capital gain does not reflect a "change in method of accounting."4 Pls.' Opp'n 2-10, ECF No. 28. Nor does the re-classification violate the duty of consistency. Id. at 2, 10-16. The duty only precludes a taxpayer's changes when the changes lead to either a loss to the government or a windfall to the plaintiff, and neither allegedly is present here. Id. Lastly, the Greiners contend that the 2008 and 2009 payments qualify for capital gain treatment because they represent the long-term return on an initial investment made by Mr. Greiner, which the Greiners allege was disposed of by sale or exchange in 2007. Id. at 2-3, 16-25.

The government replies with further support of its summary judgment motion on the three threshold defenses.5 Def.'s Reply, ECF No. 30. In addition to the parties' briefing, the court considers oral argument on the three defenses. See Tr., Apr. 21, 2015, ECF No. 32.

Because the three defenses are before the court in the posture of summary judgment, the court weighs, with respect to each defense, whether the government is "entitled to judgment as a matter of law" in the absence of a "genuine dispute as to any material fact." See R. Ct. Fed. Cl. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Am. Airlines, Inc. v. United States, 204 F.3d 1103, 1108 (Fed. Cir. 2000). As the moving party, the government carries the initial burden to set forth a prima facie case for summary judgment in its favor. See MEMC Elec. Materials, Inc. v. Mitsubishi Materials Silicon Corp., 420 F.3d 1369, 1373 (Fed. Cir. 2005) (citing Celotex

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Corp. v. Catrett, 477 U.S. 317, 322-24 (1986)); Novartis Corp. v. Ben Venue Labs., Inc., 271 F.3d 1043, 1046 (Fed. Cir. 2001) (same). If the government does so, then the burden shifts to the Greiners to rebut the government's prima facie case or to raise any triable issue of material fact. See MEMC Elec., 420 F.3d at 1373 (citing Anderson, 477 U.S. at 250); Am. Airlines, 204 F.3d at 1108; Novartis, 271 F.3d at 1046; Fulgoni v. United States, 23 Cl. Ct. 119, 125 (1991).

"Once both parties have sufficiently set forth their respective positions, the court will then inquire—whether [a reasonable trier of fact] could find, on the indisputable facts by a preponderance of the evidence, that that the movant [—here, the government—] has met [its] burden and is entitled to a judgment as a matter of law." Mulholland v. United States, 25 Cl. Ct. 748, 757 (1992) (citing Anderson, 477 U.S. at 252); Int'l Paper Co. v. United States, 39 Fed. Cl. 478, 483 (1997). As this is a tax refund suit, the court reviews the facts and law presented by the parties de novo. Bubble Room, Inc. v. United States, 159 F.3d 553, 561, 563 (Fed. Cir. 1998); Stobie Creek Invs., LLC v. United States, 82 Fed. Cl. 636, 663 (2008), aff'd, 608 F.3d 1366 (Fed. Cir. 2010); D'Avanzo v. United States, 54 Fed. Cl. 183, 186 (2002).

I. Undisputed Facts

Prior to June 1, 2004, plaintiff Jeffrey Greiner was President of Advanced Bionics Corporation (Advanced Bionics) with broad responsibility for the company's day-to-day operations. Greiner Decl. ¶ 3, App. B-1. As part of his compensation package, he received stock options. Id. ¶¶ 9-14, App. B-2-4. Pursuant to an Agreement and Plan of Merger (Merger Agreement) effective June 1, 2004, Advanced Bionics became a wholly-owned indirect subsidiary of Boston Scientific Corporation (together with its affiliates, Boston Scientific). Id. ¶ 4, App. B-1; see also Merger Agt., May 28, 2004, App. A-185-364. In connection with the merger, all stock options held by Mr. Greiner and others were vested and then cancelled. See Merger Agt. § 2.06, App. A-202. In exchange, Mr. Greiner and other option holders had the choice of converting their cancelled holdings to either a one-time cash payment at a rate of $21 per share minus the applicable strike price for each option (the Cash Election), or a one-time cash payment at $11 per share, minus the strike price, plus a contractual "earn-out" right (the Earn-out Election). Id. §§ 2.06, 2.10, 2.11, App. A-202, 204-09; Greiner Decl. ¶¶ 15-18, App. B-4.

As further explained in a contemporaneous Information Statement,6 earn-out recipients would be eligible to receive pro rata shares of post-merger payments from

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Boston Scientific to a grantor trust (the Bionics Trust).7 See Info. Statement, June 3, 2004 (2004 Info. Stmt.), App. B-25-27; Greiner Decl. ¶¶ 18, 24, App. B-4-5. Earn-out payments were not guaranteed or fixed, but would be measured by the future performance of four product lines of Advanced Bionics, 2004 Info. Stmt., App. B-17-18, 25-29; Greiner Decl. ¶ 20, App. B-4-5, that were in various stages of development, regulatory approval, and production at the time of the merger, Greiner Dep. 17:23-20:9, Jan. 27, 2014, App. C-71-74. The payment right would last nine years, from January 1, 2005 through December 31, 2013. 2004 Info. Stmt., App. B-17, 25. As the companies explained to potential earn-out recipients, "those who choose the Earn out Election" would have "an opportunity to benefit from value that may be created in the future." Id. at B-22. The earn-out recipients also would accept "material risk," however, that no or very modest earn-out payments would be made if the products failed to achieve significant sales growth or were stymied or slowed by such difficulties as regulatory hurdles, product liability lawsuits, and patent challenges,...

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