Hartman v. United States

• Decision Date: 03 December 2012
• Docket Number: No. 2011–5110.,2011–5110.
• Citation: 694 F.3d 96
• Parties: William F. HARTMAN and Therese Hartman, Plaintiffs–Appellants, v. UNITED STATES, Defendant–Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

694 F.3d 96

William F. HARTMAN and Therese Hartman, Plaintiffs–Appellants,

v.UNITED STATES, Defendant–Appellee.

No. 2011–5110.

United States Court of Appeals, Federal Circuit.

Sept. 10, 2012.

Rehearing and Rehearing En Banc Denied Dec. 3, 2012.

Kenneth R. Boiarsky, Kenneth R. Boiarsky, P.C., of El Prado, NM, argued for plaintiff-appellant.

Francesca U. Tamami, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were Tamara W. Ashford, Deputy Assistant Attorney General, Gilbert S. Rothenberg, and Kenneth L. Greene, Attorneys.

Before DYK, O'MALLEY, and REYNA, Circuit Judges.

DYK, Circuit Judge.

William F. Hartman and Therese Hartman (collectively, “the Hartmans”) appeal a decision of the United States Court of Federal Claims (“Claims Court”) granting summary judgment to the government on the Hartmans' claim for a federal income tax refund. Hartman v. United States, 99 Fed.Cl. 168 (2011). Because the Claims Court properly determined that the Hartmans were not entitled to a refund, we affirm.

Background

This case requires an interpretation of the Treasury Regulations governing the constructive receipt of income, which in turn interprets section 451 of the Internal Revenue Code, imposing a tax on “[t]he amount of any item of gross income ... for the taxable year in which received by the taxpayer.” ¹I.R.C. § 451(a). Under the Treasury Regulations, taxpayers computing their taxable income under the cash receipts and disbursements method must include as taxable income “all items which constitute gross income ... for the taxable year in which actually or constructively received.” Treas. Reg. § 1.446–1(c)(i). “Income ... is constructively received by [a taxpayer] in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.” Id.§ 1.451–2(a).

The question here is whether Mr. Hartman constructively received all shares of stock allocated to him for the sale of Ernst & Young LLP's (“E & Y”) consulting business in 2000 (as originally reported) or whether he received only that portion of the shares which had been monetized (sold) in 2000 (as reflected in the Hartmans' amended return and request for a refund).²

I

The background of this dispute began in 1999. In late 1999, E & Y was preparing to sell its consulting business to Cap Gemini, S.A. (“Cap Gemini”), a French corporation. At this time, Mr. Hartman was an accredited consulting partner of E & Y. On February 28, 2000, E & Y and Cap Gemini devised a Master Agreement for the sale of E & Y's consulting business. Under the Master Agreement, E & Y would form a new entity, Cap Gemini Ernst & Young U.S. LLC (“CGE & Y”), and would then transfer E & Y's consulting business to CGE & Y in exchange for interest in CGE & Y. Each accredited consulting partner in E & Y, including Mr. Hartman, would then receive a proportionate interest in CGE & Y. Each partner would terminate his partnership in E & Y, retaining his interest in CGE & Y. The accredited consulting partners would then transfer all of their interests in CGE & Y to Cap Gemini. In exchange for their respective interests in CGE & Y, E & Y and the accredited consulting partners were to receive shares of Cap Gemini common stock. The shares of Cap Gemini common stock would be allocated to each accredited consulting partner in accordance with his proportionate interest in CGE & Y. Additionally, each accredited consulting partner was to sign an employment contract with CGE & Y, which would include a non-compete provision. CGE & Y would then become the entity through which Cap Gemini would conduct its consulting business in North America.

As a part of the transaction described in the Master Agreement, each accredited consulting partner was also required to execute and sign a Consulting Partner Transaction Agreement (“Partner Agreement”) between the partners, E & Y, Cap Gemini, and CGE & Y. Under the Partner Agreement, the Cap Gemini shares received by each accredited consulting partner would be placed into separate Merrill Lynch restricted accounts in each individual partner's name. The Partner Agreement further provided that for a period of four years and 300 days following the closing of the transaction, the accredited consulting partners could not “directly or indirectly, sell, assign, transfer, pledge, grant any option with respect to or otherwise dispose of any interest” in the Cap Gemini common stock in their restricted accounts, except for a series of scheduled offerings as set forth in a separate Global Shareholders Agreement (“Shareholders Agreement”). J.A. B–627. The Shareholders Agreement provided for an initial sale of 25% of the shares held by each accredited consulting partner in order to satisfy each partner's tax liability in the year 2000 as a result of the transaction, and subsequent offerings of varying percentages at each anniversary following closing.³ Although their right to sell or otherwise dispose of Cap Gemini shares was restricted, the accredited consulting partners enjoyed dividend rights on the Cap Gemini shares beginning on January 1, 2000, without restriction. The dividends earned on the Cap Gemini shares were not subject to forfeiture. Additionally, the accredited consulting partners had voting rights on the Cap Gemini shares held in the restricted accounts, though they provided powers of attorney to the CEO of CGE & Y to vote the shares on their behalf.

In addition to the restrictions on the sale of the shares, certain percentages (“forfeiture percentages”) of the Cap Gemini shares were subject to forfeiture “as liquidated damages.” J.A. B–628. The percentage of shares subject to forfeiture declined over the life of the agreement and expired entirely at four years and 300 days following closing.⁴ In the period four years and 300 days following closing, the applicable forfeiture percentages of the shares would be forfeited if the accredited consulting partner (1) breached his employment contract with CGE & Y; (2) left CGE & Y voluntarily; or (3) was terminated for cause. Id. Additionally, where the accredited consulting partner was terminated for “poor performance,” he would forfeit at least fifty percent of the applicable forfeiture percentage. ⁵ Notwithstanding the monetization restrictions and forfeiture provisions, the Master Agreement provided that the parties, including the accredited consulting partners, “agree that for all U.S. federal ... Tax purposes the transactions undertaken pursuant to [the Master] Agreement will be treated and reported by them as ... a sale of a portion of the [CGE & Y] interests by ... the Accredited Partners to [Cap Gemini] in exchange for the Ordinary Shares [of Cap Gemini].” ⁶ J.A. B–123–24. Cap Gemini was required to provide E & Y and each accredited consulting partner with a Form 1099–B with respect to its acquisition of the CGE & Y interests.⁷ The Master Agreement also provided that “the parties agree that all [Cap Gemini] Ordinary Shares that are not monetized in the Initial Offering will be valued for tax purposes at 95% of the otherwise-applicable market price.” J.A. B–555.

II

In early March of 2000, E & Y held a meeting in Atlanta with all E & Y partners to discuss the details of the proposed transaction with Cap Gemini. Prior to the meeting, E & Y distributed a Partner Information Document, dated March 1, 2000, to its partners which summarized the Master Agreement and Partner Agreement, and purported to explain the tax consequences of the transaction as set forth in those agreements. The Partner Information Document provided that “[t]he sale of Consulting Services to Cap Gemini is a taxable capital gains transaction,” and that the partners would be “responsible for paying [their] own taxes out of the proceeds allocated to [them]; however, [each would] receive funds from the sale of Cap Gemini shares for [their] tax obligations as they come due.” J.A. B–726. The document further provided that “[t]he gain on the sale of the distributed [CGE & Y] shares is reportable on Schedule D of [each partner's] U.S. federal income tax return for 2000.” J.A. B–727.

Mr. Hartman and the other E & Y accredited consulting partners signed the Partner Agreement prior to May 1, 2000, and the transaction closed on May 23, 2000. By signing the Partner Agreement, Mr. Hartman became a party to the Master Agreement and thereby “agree[d] not to take any position in any Tax Return contrary to the [Master Agreement] without the written consent of [Cap Gemini].” J.A. B–124. Mr. Hartman received 55,000 total shares of Cap Gemini common stock, which were deposited into his restricted account. Twenty-five percent of Mr. Hartman's Cap Gemini shares (necessary for payment of income taxes related to the transaction) were sold in May of 2000 for approximately 158 Euros per share, for a total monetization of $2,179,187 in U.S. dollars, which was deposited into Mr. Hartman's restricted account.

On February 26, 2001, Mr. Hartman received a Form 1099–B from Cap Gemini reflecting the consideration he was deemed to have received under the Master Agreement (a total value of $8,262,183), including a valuation of his unsold Cap Gemini shares at approximately $148 per share (reflecting 95% of the market value of the shares). On August 8, 2001, the Hartmans filed a joint federal income tax return for 2000, reporting the entire amount listed on the Form 1099–B (less cost or other basis) as capital gains income. Additionally, in filing its own 2000 federal tax return, Cap Gemini used the 95% valuation of the shares to determine the value...