Schroerlucke v. United States

Decision Date21 September 2011
Docket NumberNo. 09-772T,09-772T
PartiesDONALD R. AND JOYCE D. SCHROERLUCKE, Plaintiffs, v. UNITED STATES, Defendant.
CourtCourt of Federal Claims

Federal Tax; Refund Claim; Motion for Summary Judgment; Theft Deduction, 26 U.S.C. § 165; Treas. Reg. § 1.165-1; Application of State Law; Ga. Code Ann. §§ 16-8-2-16-8-5

Edward D. Fickess, Andreozzi Fickess LLP, Clarence, NY, for the plaintiffs. With him was Randall P. Andreozzi, Andreozzi Fickess LLP.

Benjamin C. King, Jr., Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, DC, for the defendant. With him were Steven I. Frahm, Chief, Court of Federal Claims Section and John A. DiCicco,

Principal Deputy Assistant Attorney General, Tax Division.

OPINION

HORN, J.

FINDINGS OF FACT

Plaintiffs, Donald and Joyce Schroerlucke, filed a complaint in the United States Court of Federal Claims alleging they were due a tax refund for unreimbursed losses for the 1997, 1998, 1999, and 2002 tax years. Plaintiffs are husband and wife who filed joint federal income tax returns during all years relevant to this action. In each of those years, the plaintiffs were residents of the State of Georgia. Plaintiff Donald Schroerlucke is a former employee of WorldCom, Inc. In 1989, Mr. Schroerlucke was employed as Vice President of Operations at Long Distance Discount Services, Inc., the predecessor corporation to WorldCom. Pursuant to stock option agreements with Long Distance Discount Services, Inc., and then with WorldCom, Mr. Schroerlucke accumulated employee stock option grants between July 1991 and January 1998.

Mr. Schroerlucke's employment with WorldCom ended on January 4, 1999, at which time his stock options became fully and immediately vested according to the terms of the stock option agreements. Also, according to the terms of the stock option agreements and an April 7, 1998 memorandum titled, "WorldCom Employee StockOption Program," once his employment ended, Mr. Schroerlucke was required to immediately exercise all of his employee stock options. The April 7, 1998 memorandum stated in part: "Please note that under the WorldCom Inc. 1997 Stock Option Plan, all vested options must be exercised prior to termination with the Company." (emphasis in original). After a final stock option grant award on January 2, 1998, Mr. Schroerlucke had accumulated 172,492 WorldCom stock options. Mr. Schroerlucke exercised all of his existing stock options on February 12, 1999, at which time the market value of his 172,492 WorldCom shares was $13,702,333.25, based on the $79.4375 per share, February 12, 1999, closing price of WorldCom stock.1 Shortly after exercising his options, Mr. Schroerlucke sold 75,374 shares of the WorldCom stock he had received through those options at $80.67 per share, for a total of $6,082,586.97. He used part of the proceeds of that sale to pay the exercise price to WorldCom of $1,834,856.47 and to pay withholding taxes totaling $4,228,847.50. The remaining 97,118 shares of WorldCom stock from the option exercise, worth $7,714,811.12 (based on the $79.4375 per share February 12, 1999 closing price of WorldCom stock), were deposited into Mr. Schroerlucke's brokerage account.

At all times after February 12, 1999, when the stock options were exercised, Mr. Schroerlucke retained full ownership and control over his remaining WorldCom stock holdings, and he had the right to sell, or not sell, all or part of his WorldCom stock, at any time, and at his discretion. As of February 28, 1999, the market value of Mr. Schroerlucke's remaining WorldCom stock had risen from $7,714,811.12 to $8,012,235.00, based on the $82.50 per share price on that date. Mr. Schroerlucke appears to have held onto the remaining shares of WorldCom stock until May of 2002, when he began selling. On May 1, 2002, Mr. Schroerlucke sold 80,000 WorldCom shares for $175,189.37, for which his tax basis was $4,302,498.70, resulting in a net loss of $4,127,309.33. On May 24, 2002, Mr. Schroerlucke sold 1,242 WorldCom shares for $2,093.35, for which his tax basis was $66,796.29, resulting in a net loss of $64,702.94. On September 12, 2002, Mr. Schroerlucke sold 47,5162 WorldCom shares for $6,124.39, for which his tax basis was $2,555,469.11, resulting in a net loss of $2,549,344.72. In total, a net long-term capital loss of $6,741,3583 was reported by Mr. and Mrs. Schroerlucke on their 2002 tax return.

Mr. Schroerlucke alleges that he was informed on a continuing basis that his stock was safe and would hold its value. For example, plaintiffs point out that Bernard Ebbers, then-Chief Executive Officer (CEO) of WorldCom, stated in a 1997 form letter to Mr. Schroerlucke that accompanied the award of stock options, "[t]he value of this reward increases as our stock performs successfully." Mr. Ebbers further stated, in an undated form letter to Mr. Schroerlucke, "our [WorldCom's] track record for creating shareholder value is unparalleled" and "WorldCom received a letter grade of A for stock market performance over the 10-year period ending December 31, 1997, placing us in the top 20% of the overall ranking." In an April 7, 1998 memorandum titled "WorldCom Employee Stock Option Program," the company indicated that employees who chose the "Exercise and Sell Balance" method would "give up future potential stock price appreciation." The memorandum indicated that employees also could choose to "Exercise and Hold" or "Exercise and Sell to Cover," and both methods would mean that the employee had "an investment in WorldCom's future."

Also, according to plaintiffs, "[j]ust prior" to Mr. Schroerlucke's exercise of his WorldCom stock options in February 1999, Mr. Schroerlucke spoke with Mr. Ebbers over the phone. During this call, Mr. Schroerlucke "asked Mr. Ebbers about his family and how the company was doing." Mr. Ebbers replied "everything was fine with the family and the company was doing well." Additionally, Mr. Schroerlucke indicates that during his employment at WorldCom, which ended on January 4, 1999, he had "numerous contacts with various top-level officials at WorldCom, including CEO Ebbers and CFO [Chief Financial Officer] Scott Sullivan." These contacts, according to Mr. Schroerlucke, were often "one-on-one meetings or meetings with other WorldCom officials, in both business and personal settings." According to Mr. Schroerlucke, "[d]uring all of these contacts, WorldCom and its officials or agents represented that WorldCom was an exceptional company and could be trusted to run its business in an ethical and honest fashion." Moreover, according to Mr. Schroerlucke, "[o]n numerous occasions, Mr. Ebbers personally and specifically discouraged Plaintiff from selling any WorldCom shares."

According to the criminal indictment of Mr. Ebbers, beginning in September 2000, then-CEO Ebbers and then-CFO Scott Sullivan "engaged in an illegal scheme to deceive members of the investing public, WorldCom shareholders, securities analysts, and the SEC, and others, concerning WorldCom's true operating performance and financial results." According to the criminal indictment, during this time, Mr. Ebbers and Mr. Sullivan presented a "materially false and misleading picture of WorldCom's operating performance and financial results" as part of a "scheme to deceive" and "inflate and maintain artificially the price of WorldCom common stock." On March 15, 2005, Mr. Ebbers was convicted of all nine counts for which he was indicted, including conspiracy to defraud the United States, and using manipulative and deceptive devices in connection with the purchase or sale of a security. On August 12, 2005, Mr. Sullivanpled guilty to a number of counts in his indictment, including conspiracy to defraud the United States, and using manipulative and deceptive devices in connection with the purchase or sale of a security.

According to the jointly stipulated facts submitted by the parties, the closing price of WorldCom stock sharply declined from March 2002 until June 24, 2002 when the closing price was $0.91 per share. On June 26, 2002, NASDAQ suspended trading of WorldCom stock until July 1, 2002. On July 21, 2002, WorldCom, and all of its subsidiaries, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York. Mr. Schroerlucke, who had acquired all of his WorldCom stock on or before February 12, 1999, was not eligible to participate in the securities fraud class action lawsuit which was brought against WorldCom on April 30, 2002. Only those who had purchased WorldCom stock between April 29, 1999 and June 25, 2002 were eligible participants in the class action suit. See In re WorldCom, Inc., Sec. Litig., 294 F. Supp. 2d 392, 397 (S.D.N.Y.), motion to certify appeal denied, 2003 WL 22533398 (S.D.N.Y. Nov. 7, 2003).

On April 11, 2003, plaintiffs Donald and Joyce Schroerlucke filed their 2002 Form 1040 with the Internal Revenue Service (IRS), in which they claimed a capital loss of $6,741,348.00 as a result of the sale of 128,758 shares of WorldCom stock. Based on this capital loss, plaintiffs claimed and received the maximum, annual, capital loss deduction of $3,000.00, pursuant to 26 U.S.C. § 1211(b) (2006) on their 2002 return.4 26 U.S.C. § 1211(b).5 On April 7, 2006, plaintiffs filed a 2002 Form 1040X, which amended their original capital loss claim to a theft loss claim under the provisions of 26 U.S.C. § 165 (2006), as a result of which plaintiffs claimed an additional refund of $9,959.00. Based on a carry back of their claimed theft loss in 2002, plaintiffs claimed additional refunds by filing amended tax returns for 1997, 1998, and 1999 on April 7, 2006 in the amounts of $63,018.00, $39,366.00, and $2,549,207.00, respectively. In total, plaintiffs' claims for refunds, based on alleged theft losses on their WorldCom stock, amounted to $2,661,550.00, resulting from unreimbursed theft losses of $6,530,047.53. The parties agree that plainti...

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