MacNaughton v. U.S.

Decision Date29 December 1989
Docket NumberNo. 88-5359,88-5359
Parties-5807, 89-2 USTC P 9599 David V. MACNAUGHTON and Virginia R. MacNaughton, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

John P. Konvalinka, M. Elizabeth McCroskey (Argued), Grant, Konvalinka & Grubbs, Chattanooga, Tenn., for David V. MacNaughton, M.D. and Virginia R. MacNaughton.

John W. Gill, Jr., U.S. Atty., William Sonnenberg, Asst. U.S. Atty., Chattanooga, Tenn., Gary R. Allen, Acting Chief, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., William S. Rose, Jr., Asst. Atty. Gen., U.S. Dept. of Justice, Tax Div. Appellate Section, J.I. Oppenheimer (argued), Paul M. Predmore, Trial Atty., Office of the U.S. Dept. of Justice, Tax Div., Washington, D.C., for U.S.

Before KENNEDY and JONES, Circuit Judges, and SILER, Chief District Judge. *

NATHANIEL R. JONES, Circuit Judge.

Plaintiffs-appellants, David and Virginia MacNaughton, appeal the jury verdict and the district court's denial of their motion for judgment notwithstanding the verdict (JNOV) or a new trial in this action for the recovery of income tax and interest. For the reasons set forth below, we affirm.

I.

Many of the relevant facts in this case are not in dispute. In 1975 or 1976, Jerry Edward Gilliland and Bobby Rouse formed Area Psychological Clinic, P.C. (Clinic) and became its principal shareholders. Thereafter, in 1976, Gilliland, Rouse and others (Stockholders) acquired Area Psychological Hospital, Inc. (APH or Hospital) and, in so doing, pledged 30,800 of the 40,000 authorized and issued shares of APH common stock to the sellers of the Hospital and a financing institution. The Clinic and APH had a professional affiliation whereby many of the doctors employed by the Clinic also treated patients at APH.

Prior to 1977, David MacNaughton was the sole shareholder of David V. MacNaughton, Jr., M.D., P.C. (PC). 1 On February 1, 1977, the Clinic hired MacNaughton as one of its in-house physicians. During the course of his employment at the Clinic, MacNaughton treated the Clinic's patients and, as one of its physicians, also admitted patients to APH. Sometime in 1977, MacNaughton's PC merged with APH and he exchanged his PC stock for APH stock of equal value. MacNaughton's APH stock certificate contains the following legend: "The transfer of this certificate is subject to a stock restrictive agreement, copy of which is in the office of the attorney for the corporation." J. App. at 644. The APH stock certificates of other shareholders contain a legend which states that the "transfer of this certificate is subject to a certain pledge agreement and a stock restrictive agreement, copies of which are in the office of the attorney for the corporation." Id. at 669 (emphasis added). MacNaughton claims that he acquired the APH stock as an investment and that he had never owned stock in the Clinic. Moreover, both he and Gilliland contend that his APH stock was not given in recognition of any services rendered for the Clinic.

In 1979, Rouse, Gilliland and several others founded Health Care Corporation (HCC). Thereafter, APH merged into Valley Psychiatric Hospital Corporation (VPH), a wholly-owned subsidiary of APH, and MacNaughton exchanged his APH stock for VPH stock in January 1980. Unlike his APH stock certificate, however MacNaughton's VPH stock certificates did not contain a restrictive legend. In December 1980, HCC agreed to acquire the stock of VPH and MacNaughton ultimately surrendered his VPH stock for HCC stock in March 1981. The HCC stock did not contain a restrictive legend. MacNaughton ultimately terminated his employment with the Clinic in September 1981. In December 1981, HCC subsequently merged with Hospital Corporation of America (HCA), a publicly traded corporation affiliated with APH, VPH or HCC. MacNaughton eventually exchanged his HCC stock for HCA stock (which he still owns).

On August 5, 1985, the Commissioner of the Internal Revenue Service (IRS) assessed income tax deficiencies against MacNaughton. MacNaughton paid the assessed tax and interest and filed a refund claim which the IRS subsequently denied. MacNaughton then filed suit in federal district court, seeking a refund of the taxes assessed against him.

In support of the tax assessment, the Government asserted at trial that, pursuant to section 83 of the Internal Revenue Code of 1954, MacNaughton should have included in his taxable income for 1981 the difference between the value of the HCA stock and his basis in the PC stock that he originally surrendered. Section 83 provides, in pertinent part, that

If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of--

(1) the fair market value of such property ... at the first time 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 occurs earlier, over

(2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which ... such property [is] transferable or [is] not subject to a substantial risk of forfeiture, whichever is applicable.

The Government introduced evidence at trial that Rouse, as President of University Hospital, Inc. (University Hospital) and Gilliland, as the Secretary-Treasurer of University Hospital, executed a stock buy/sell agreement between University Hospital and one Dr. Jones who was employed with Campbell Clinic Association, Inc. (Campbell Clinic). University Hospital and Campbell Clinic had a professional arrangement, similar to the arrangement between APH and Area Psychological Clinic, in which physicians at Campbell Clinic treated patients both at the Clinic and the Hospital. The University/Jones agreement required that Jones give University Hospital the initial right to purchase his University Hospital stock if he terminated his employment with Campbell Clinic. Although the Government insinuated that a similar agreement existed between MacNaughton and APH, Rouse and Gilliland testified that, to the best of their knowledge, no such agreement was executed.

The jury was instructed to render special verdicts on the following questions: whether MacNaughton received the APH stock in connection with the performance of services; whether the APH/VPH/HCC stock was subject to a substantial risk of forfeiture or was not otherwise freely transferable; whether any restrictions on transferability were removed in some year other than 1981; and, if so, what year the restrictions were removed. The jury found that the stock was received in connection with the performance of services, that the stock was subject to restrictions on transferability and that those restrictions were removed in 1981. Thus, the jury determined that MacNaughton should have included in his taxable income for 1981 the fair market value of the HCC stock in 1981 less the amount that MacNaughton "paid" for the APH stock in 1977.

MacNaughton moved for JNOV and for a new trial contending that the evidence was legally insufficient to support the jury's verdict; that the court erred in admitting evidence relating to the buy/sell agreement between University Hospital and Jones; that the Government made improper remarks in closing argument; and that the jury charge contained errors. The district court rejected all of MacNaughton's claims and denied his motion. This timely appeal followed.

II.

MacNaughton argues, on various grounds, that the evidence presented by the Government was insufficient to support the jury's verdict. He further contends that the district court erred in denying his motion for JNOV or a new trial. In determining whether the evidence is sufficient to support a jury verdict, the evidence, and the reasonable inferences drawn therefrom, must be viewed in the light most favorable to the non-moving party. Wilkins v. Eaton Corp., 790 F.2d 515, 522 (6th Cir.1986). The court must not consider the credibility of witnesses nor weigh the evidence because to do so would "substitute the court's opinion for that of the jury." Id. In addition, in ruling on a motion for JNOV or a new trial on the basis of the sufficiency of the evidence, a court may not set aside the jury verdict merely because the opposite conclusion could have been reached or because different inferences could have been drawn. Rather, the court must determine whether any reasonable jury could have reached the verdict based on the evidence presented at trial. Bruner v. Dunaway, 684 F.2d 422, 425 (6th Cir.1982), cert. denied, 459 U.S. 1171, 103 S.Ct. 816, 74 L.Ed.2d 1014 (1983).

A.

MacNaughton's first contention is that section 83 applies only to stock which is compensatory in nature. Since his APH/VPH/HCC stock was not compensation for services he rendered at the Clinic, MacNaughton claims that the stock was not transferred in connection with the performance of services. Although the language of section 83 and the treasury regulations relating to the section, see, e.g., Treas.Reg. Sec. 183-3(F), do not explicitly define the phrase "in connection with the performance of services," this issue has been addressed by the Ninth Circuit Court of Appeals. In Alves v. C.I.R., 734 F.2d 478, 481 (9th Cir.1984), the court discussed whether the phrase "in connection with the performance of services" means that the employee must be "receiving compensation for his performance of services." (Emphasis added). The Alves court stated that the plain language of section 83(a) belied this argument because the "statute applies to all property transferred in connection with the performance of services" and because no "reference is made to the term 'compensa...

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