U.S. v. Fort

Decision Date19 April 2011
Docket NumberNo. 10–13053.,10–13053.
Citation638 F.3d 1334
PartiesUNITED STATES of America, Plaintiff–Appellee,v.Danny C. FORT, Sherri E. Fort, Defendants–Appellants.
CourtU.S. Court of Appeals — Eleventh Circuit


Francesca U. Tamami, Kenneth L. Greene, Gilbert S. Rothenberg, U.S. Dept. of Justice, Tax Div., Lynne M. Murphy, Washington, DC, for U.S.A. Todd Merolla, Metrolla & Gold, LLP, Atlanta, GA, Mark L. Rosenberg, Law Offices of Mark L. Rosenberg, Julian H. Spirer, Spirer Law Firm, Bethesda, MD, for DefendantsAppellants.

Appeal from the United States District Court for the Northern District of Georgia.Before MARCUS and ANDERSON, Circuit Judges, and ALBRITTON,* District Judge.ALBRITTON, District Judge:

This case presents an appeal by Danny C. Fort (Fort)1 of a grant of summary judgment in favor of the United States. The government brought this action against Fort to recover a tax refund of over $300,000 that it contends was erroneously refunded. For the reasons set forth below, we affirm the district court's entry of summary judgment in favor of the government.

A. Ernst & Young Sells its Consulting Business to Cap Gemini

In early 2000, Ernst & Young (“E&Y”) prepared to spin off and sell its information-technology consulting business to Cap Gemini, S.A. (“Cap Gemini”), a French corporation. At this time, Fort was a partner in that consulting business. On February 28, 2000, E&Y and Cap Gemini executed a Master Agreement that detailed the terms of the transaction.

Under the Master Agreement, the proceeds of the sale were divided among E&Y's partners. For consulting partners who qualified as accredited investors under SEC rules, such as Fort, the consulting partner agreed to terminate his or her interest in E&Y, and in exchange, received a distribution of Cap Gemini shares. Additionally, these partners would begin working at a new entity, Cap Gemini Ernst & Young (“CGE&Y”), under employment agreements containing non-compete clauses.

Cap Gemini shares would not be distributed outright to each partner. Rather, 25% of each partner's shares would be sold immediately to cover that partner's income taxes incurred as a result of this transaction, and the other 75% of the shares (the “Restricted Shares”) were placed into an individual account in the partner's name at Merrill Lynch.

The Restricted Shares could not be withdrawn from the partner's account at Merrill Lynch immediately, and therefore, the Merrill Lynch accounts were like escrow accounts. For four years and 300 days following the closing, partners could only sell portions of the Restricted Shares at scheduled times. After the four-year, 300–day period, the partners could withdraw all remaining Restricted Shares from the Merrill Lynch account. Arthur Gordon (“Gordon”), the former tax director of E&Y's consulting practice, who helped structure this transaction, stated that the reason for these restrictions was to prevent all of the partners from selling too many Cap Gemini shares at once, thereby diminishing the value of the shares.

The Restricted Shares were also subject to forfeiture as “liquidated damages” if a partner (1) breached his employment agreement; (2) voluntarily left his employment; or (3) was terminated. The amount of forfeitable shares decreased with each anniversary of the closing date that the partner remained at CGE&Y, so, generally, the longer a partner worked for CGE&Y, the fewer shares he or she would forfeit if the forfeiture provision were triggered.

Additionally, the termination forfeiture requirement applied to only two types of termination, and the number of Restricted Shares forfeited upon termination depended on under which type a partner was terminated. If a partner was terminated “for cause,” the partner forfeited the full amount of the forfeitable Restricted Shares. However, if a partner was terminated for “poor performance,” the partner forfeited at least 50% of the forfeitable Restricted Shares, but could keep a percentage of the remaining 50%, as determined by a review committee.

Partners also would have dividend and voting rights in the Restricted Shares. The dividends paid on the Restricted Shares were not subject to forfeiture, and partners could withdraw these dividends shortly after they were declared. As for voting, Merrill Lynch's French affiliate would vote a partner's shares “as instructed by [the partner] as beneficial owner.”

Because of the restrictions placed upon the Restricted Shares, the Master Agreement stated that, for tax purposes, the Restricted Shares would be valued at 95% of the closing price of Cap Gemini stock on the closing date.

B. The Partners Vote to Approve the Transaction

To help the partners determine how to vote on the sale, E&Y prepared a Partner Information Document (“PID”), which summarized the proposed transaction and discussed its tax implications. The PID stated that the sale “is a taxable capital gains transaction,” and that it “has been agreed that Ernst & Young, its partners, and Cap Gemini will treat valuation and related issues consistently for U.S. federal income tax purposes.” The PID further included hypothetical tax calculations that showed the gain from receiving the Restricted Shares was reportable in full in 2000. It was generally expected that the stock would appreciate in value, and this structure was designed to assure capital gains treatment, with all tax on the then-value of all of the stock being paid in 2000.

At the conclusion of a meeting of partners in Atlanta on March 7 and 8, 2008, 95% of the consulting partners, including Fort, voted in favor of the transaction.

Fort subsequently signed the Partner Agreement, making him a party to the Master Agreement.

C. Fort's 2000 Tax Return

The transaction closed on May 23, 2000. Twenty-five percent of Fort's shares were sold at closing and the proceeds turned over to Fort, to cover taxes due based on receipt of the full value of all the stock in 2000. The remaining 75%, the Restricted Shares, were deposited into Fort's Merrill Lynch account.

Fort reported gross proceeds of $1,759,097 from this transaction on his 2000 income tax return. At this time, the Cap Gemini stock was worth approximately $156 per share.

In September 2003, Fort was terminated as part of a downsizing. At this time, the value of the Cap Gemini shares had declined substantially. Cap Gemini did not require Fort to forfeit any of his Restricted Shares. Shortly after his termination, Fort learned that several former E&Y consulting partners had filed amended year 2000 tax returns, claiming that they did not realize income from the Restricted Shares in that year. Fort followed suit, filing his own year 2000 amended return, asserting that he did not realize income in 2000 from the then-value of the Restricted Shares.

The IRS initially accepted Fort's amended return and granted him a refund for his 2000 tax return. Subsequently, however, the IRS determined that the refund to Fort was in error, and the government filed this suit to recover the refund.

D. The District Court Grants the Government's Motion for Summary Judgment

The district court granted the government's motion for summary judgment and awarded it the disputed amount. United States v. Fort, No. 1:08–CV–3885–TWT, 2010 WL 2104671, at *3 (N.D.Ga. May 20, 2010). The court stated that taxable income during a given taxable year includes all income from whatever source derived that is “actually” or “constructively” received during that year. Id. at *1 (citing 26 U.S.C. § 61(a)(3); 26 C.F.R. § 1.61–2(a)). While the court assumed that Fort did not actually receive the Restricted Shares, it concluded that he constructively received them, because:

He alone stood to gain or lose money based on the stock's performance. He received the benefit of the dividends paid on the shares, and he had the right to direct how the shares would be voted. Moreover, he knowingly agreed to the sale restriction and the forfeiture provision. He also agreed to the amount of the discount.

Id. at *2.

The district court also rejected Fort's argument that the forfeiture provision prevented him from constructively receiving the Restricted Shares in 2000. The court explained that “the fact that the partners risked having to return some of their shares at a later time does not mean that they did not constructively receive the shares in the first place.” Id.

Subsequently, Fort filed a timely appeal to this court.


This court reviews a district court's grant of summary judgment de novo, applying the same legal standards used by the district court. Galvez v. Bruce, 552 F.3d 1238, 1241 (11th Cir.2008). Summary judgment is appropriate where, viewing the movant's evidence and all factual inferences arising from it in the light most favorable to the nonmoving party, there is no genuine issue of any material fact, and the moving party is entitled to judgment as a matter of law. Id.

This court may affirm a decision of the district court on any ground supported by the record. Bircoll v. Miami–Dade Cnty., 480 F.3d 1072, 1088 n. 21 (11th Cir.2007).


Fort has appealed the grant of summary judgment in the government's favor, arguing that he did not “receive” the escrowed shares of stock in the year 2000 for tax purposes, and, therefore, was not taxable for their value in that year.

A. The Danielson Rule

The first issue is the application of the Danielson Rule to this case. See Comm'r v. Danielson, 378 F.2d 771 (3d Cir.1967). The government argues, citing to Danielson, that Fort's ability to challenge his 2000 tax return is limited, because the CGE&Y agreement stated that Fort agreed to report his receipt of the Restricted Shares as income received in 2000. Fort responds that the Danielson rule is inapplicable to this case.

The government's argument is misplaced. Danielson and its progeny recognize that parties may agree to a...

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