United States v. Levandowski (In re Levandowski)
| Docket Number | 4:22-cv-02781-YGR,4:22-cv-02783-YGR,4:22-cv-02786-YGR,4:22-cv-02789-YGR,Bankruptcy 20-30242 (HLB) |
| Decision Date | 14 March 2023 |
| Parties | THE UNITED STATES OF AMERICA on behalf of THE INTERNAL REVENUE SERVICE v. ANTHONY SCOTT LEVANDOWSKI, ET AL. Appellees. In re ANTHONY SCOTT LEVANDOWSKI, Debtor. and CALIFORNIA FRANCHISE TAX BOARD, Appellants, v. |
| Court | U.S. District Court — Northern District of California |
On appeal from:
(Jointly Administered)
OPINION REVERSING AND REMANDING TAX ORDER; AFFIRMING IN PART AND REMANDING IN PART CONFIRMATION ORDER
The United States of America, on behalf of the Internal Revenue Service (“IRS”), and the California Franchise Tax Board (“FTB”) (collectively the “Tax Agencies”) commenced four separate appeals in connection with debtor Anthony Scott Levandowski's (“Levandowski”) Chapter 11 bankruptcy proceedings. Peter Kravitz was appointed Trustee of the Levandowski Residual Liquidation Trust (“Trustee”) and has since joined Levandowski in these appeals as an appellee.[1] All of the appeals have been consolidated for administrative purposes under lead case No. 4:22-cv-02781. (Dkt. No. 19.)[2]
Relevant to the underlying appeals are two orders of the bankruptcy court that were entered on May 2, 2022: (1) Order Granting Debtor's Motion to (I) Determine Tax Effect of Settlement Payment or (II) Find the Debtor's Plan Feasible without Reserving for Tax Thereon (IRS/FTB) (the “Tax Order”); and (2) Findings of Fact, Conclusions of Law and Order Approving and Confirming the Debtor in Possession's Combined Disclosure Statement and Chapter 11 Plan dated March 29, 2022 (the “Confirmation Order”). Each order was appealed by the Tax Agencies and has been separately briefed. While each tax agency has filed its own brief, the substantive arguments largely parrot one another.[3]
Having closely considered the motion and the record in this case the Court HEREBY ORDERS:
The Court assumes the parties' general familiarity with the factual circumstances giving rise to the Chapter 11 bankruptcy proceedings and incorporates the background information previously set forth in prior orders from this Court.[4]
Relevant to the issues on appeal, Google, LLC (“Google”), Uber Technologies, Inc. (“Uber”), and Levandowski entered into a global settlement. The global settlement resolved Levandowski's and Uber's dispute concerning their rights and obligations under an indemnification agreement and outlined a confirmation plan to resolve Levandowski's Chapter 11 proceedings, including the payment of Google's claim against Levandowski premised on a judgment of $179,047,998.64. Pursuant to the global settlement, Uber would make two payments in support of confirmation: (1) an “indefeasible” payment directly to Google (the “Main Uber Payment”) for an amount that was sealed by the bankruptcy court below; and (2) a $2,000,000 payment to the estate to fund additional expenses to carry out the proposed plan.
On February 10, 2022, Levandowski moved the bankruptcy court to approve the global settlement between the parties. Copies of this motion were served on the Tax Agencies and the Tax Agencies did not file any objections to approval of the global settlement, including its proposed plan for confirmation. In the motion to approve the compromise, Levandowski broadcast that he was still considering the tax consequences of the global settlement. The bankruptcy court then directed Levandowski to file a motion to determine the tax consequences of the global settlement pursuant to 11 U.S.C. § 505. A scheduling order required that the tax motion be filed no later than March 18, 2022 and indicated that if oppositions were not filed by April 1, 2022, at 4:00 p.m., the bankruptcy court “may deem the affected parties unopposed to the relief sought.” Complying with the order, Levandowski timely filed his motion for a tax determination (the “Tax Motion”). In short, it sought a determination that the Main Uber Payment (not the second payment for $2,000,000) does not give rise to gross income for the debtor (not the estate), or alternatively, to find the proposed plan feasible without reserving for taxes because there was little to no risk to the debtor or the estate.
Substantively, the Tax Motion asserted that the bankruptcy court had jurisdiction to make the tax determination under 11 U.S.C. § 505(a)(1). At the highest level, the Tax Motion argued that the Main Uber Payment was a payment from Uber to Google and did not create a net increase in wealth to Levandowski to constitute gross income. Levandowski proceeded to draw four analogues to support the “obvious” result that he advanced: (1) the indemnification agreement and Main Uber Payment are akin to a non-taxable insurance payment; (2) a tax benefit was not incurred from the Main Uber Payment; (3) the Main Uber Payment is a working condition fringe that is excludable from gross income; and (4) the Main Uber Payment is a deductible employee reimbursement.
The Tax Agencies opposed the Tax Motion. Specifically, the IRS timely filed an opposition that only challenged the bankruptcy court's jurisdiction to make the tax determination requested. Because the IRS claimed that it did not have sufficient time to review the tax issues in the Tax Motion, especially given the sealed nature of the payment, it reserved addressing the substance of the Tax Motion until after a resolution of the jurisdictional issues. It never sought an extension of its deadline. The FTB also filed an opposition, however, it was technically untimely under the scheduling order because it was filed after the 4:00 p.m. deadline. Unlike the IRS, the FTB addressed the substance of the Tax Motion. However, like the IRS, the FTB indicated that it had insufficient information to seriously respond to the tax issues presented. Again, no extension or continuance was requested.
After briefing concluded, the bankruptcy court held a hearing on the Tax Motion on April 21, 2022. At the hearing, the IRS presented its arguments concerning the lack of jurisdiction and the FTB joined. However, the FTB cautioned that any determination should be made to the estate as to the debtor, even though the motion appears to have only applied to the debtor. Since only the FTB addressed the merits in its opposition, the FTB argued the substantive tax issues.
Once argument concluded, the bankruptcy court issued an oral ruling on the Tax Motion. It found that it had subject matter jurisdiction to make the tax determination pursuant to the express authority conferred by 11 U.S.C. § 505(a). The bankruptcy court also found that “[c]onstitutional ripeness exists because the circumstances of this case, the pending settlement motion, the request for confirmation of Mr. Levandowski's plan, the pendency of the tax motion, all responses to those pleadings show that an actual immediate dispute and controversy exists.” Turning to the merits of the tax dispute, the bankruptcy court acknowledged that “Levandowski grounds his assertion that the Uber settlement payment does not give rise to gross income attributable to him or his bankruptcy estate in four alternative theories.” The Court expressly noted that the IRS never requested additional time to address the substantive issues and asserted that “[t]he IRS will have to live with the consequences of its dilatory conduct.” The IRS did not object and did not request the bankruptcy court to reconsider the position on the record.
Focusing on Levandowski's insurance analogy, the bankruptcy court found that “[t]he FTB and Mr. Levandowski do not dispute that insurance payments made to third parties on behalf of their insureds are not included in the insured's gross income for tax purposes” and that the court “must look to the common law for guidance” on what constitutes insurance given that the Internal Revenue Code does not define insurance. Drawing upon the factors set forth in AMERCO & Subsidiaries v Commissioner, 96 T.C. 18 (1991),[5] the bankruptcy court found that the transaction at issue was akin to an insurance transaction for tax purposes because insurance risk existed, the risk of any litigation with Google was shifted to Uber, and there was sufficient risk distribution across the five employees that Uber agreed to indemnify. It further found that the payment conformed to common accepted notions of insurance because Uber acted like an insurer by conducting due diligence, assumed and distributed risk, and no contrary authority was provided to support a different result. Concluding that the indemnification agreement constituted insurance, the bankruptcy court found that the Main Uber Payment did not constitute gross income for Levandowski or for the estate, but provided no analysis of how or why the tax determination bore on the estate compared to just that of Levandowski. Since the insurance analogy dispenses of...
To continue reading
Request your trial