With the return of Canada's Parliament to business this week, debate theoretically should take place on Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting, a.k.a. the "Multilateral Instrument in Respect of Tax Conventions Act" (the official short title). But we can call it the BEPS bill since its job is to implement a set of consensus positions the OECD developed to eliminate "Base Erosion and Profit Shifting" by multinational taxpayers.
This BEPS Bill implements the OECD's MLI to Prevent BEPS, which is a multilateral treaty that amends existing bilateral tax treaties. The rationale is that countries were engaging in or at least facilitating BEPS, and they were often doing so through tax treaties, so a blanket change to a few thousand of these treaties was needed to prevent ongoing tax avoidance.
Given that the BEPS bill adopts one treaty to rule them all, Parliament might be expected to undertake careful scrutiny of its terms, but these expectations are not likely to be met. A study I completed with help from a very adept graduate student in 2016, entitled “While Parliament Sleeps: Tax Treaty Practice in Canada,” (published in the Journal of Parliamentary and Political Law / Revue de droit parlementaire et politique 10 (1) : 15-38, March / mars 2016 and available in draft form here), found that over a fifteen year period, Parliament has adopted legislation implementing 32 international tax agreements without a single standing vote occurring in the House of Commons at any point in the legislative process.
These 32 agreements collectively form over 750 pages of binding law in Canada, none of which was considered for more than two sittings at any stage of consideration in either the Senate or House of Commons.
In Canada, tax-treaty implementing legislation is generally introduced in the Senate, studied very little there, and then sent to the House of Commons where it receives even less attention. Although tax scholars focus, rightfully, on scrutinizing the substance of tax treaties, we should not be lulled into ignoring the process by which Parliament discharges its role in legislating tax treaty implementation. To that end, some of the debate in Parliament is downright disappointing.
For example, consider the most recent exercise (written after my study), when the Senate was seized with Bill S-4, whose official summary reads:
This enactment implements a convention between the Government of Canada and the Government of the State of Israel for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and an arrangement between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office in Canada for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. It also amends the Canada–Hong Kong Tax Agreement Act, 2013 to add to it, for greater certainty, an interpretation provision.In a speech of only a few minutes on the bill, the Legislative Deputy of the Government Representative in the Senate stated:
It is urgent that we move forward with the study of this bill because if we want the agreements on double taxation to go into effect in 2017, the bill must receive Royal Assent by the end of 2016. Therefore, I invite all honourable Senators who wish to speak to this bill to do so as quickly as possible so that the bill may be referred to a committee as soon as possible.In total, the entire House Finance Committee's study took less than 15 minutes. The third reading debate in the Senate lasted less than 10 minutes and, after calling the bill a "no-brainer," a "marvellous bill," and "a continuity-of-government bill" that "does wonderful things for Canadian industry and consumers alike," the Senators continued with this exchange:
Senator Day: Should I tell anybody what this bill is about?Then followed a dubiously notable comment by Senator Plett that "I'd like to add my voice and simply say that this, again, is clear evidence that occasionally a good biscuit can be found in a garbage can."
Some Hon. Senators: No.
The idea that Parliament should rush to meet the government’s preferred timetable in what the Senate characterizes as a "garbage can" of a bill (or of a government--I am not sure which) is highly problematic. If it takes longer to scrutinize a bill, so be it. The government – for its part – didn’t leave Parliament much time in this case, having only introduced S-4 in the Senate on November 1st, 2016. By the time the Legislative Deputy of the Government Representative in the Senate got to make her speech on November 24th, the clock was ticking quickly toward the MPs' and Senators' winter break.
I single out this debate not only for the unprincipled concession to expedited timing, but particularly for the exchange that followed. A Senator asked the Legislative Deputy of the Government Representative in the Senate “In your opinion, does the bill before us pertain to our participation in the WTO?” The response: “I do not know much about this bill. However, I do know that it is important, that it is urgent that we move it along, and that it has significant consequences.”
Putting aside the carefree decision to speak to a bill one “does not know much about” and the apparent confusion about how the bill relates to the WTO (did the Senator mistake a tax treaty for a trade agreement?), it would be hard to characterize the limited early Senate Chamber debate as well-informed or thoughtful in any way. On the House side, the bill was fast-tracked – a motion passed by unanimous consent stipulated that “when the House begins debate on the third reading motion of the Bill, a Member from each recognized party, as well as a Member from the Bloc Québécois, may speak for not more than five minutes, with no question and comment period, after which the Bill shall be deemed read a third time and passed."
As such, in its last debate, the bill received less than 20 minutes of attention in the House with no questions –that is, each party spoke but there was no dialogue in substance. The bill received Royal Assent on December 15th, 2016.
This brings me back to the BEPS Bill, which actually bucks the trend by being introduced in the House of Commons instead of the Senate. This is important because even though Senate debates on tax treaty implementing legislation are limited (as evidenced above), the Senate is still the body that generally studies these matters and has nominally built up expertise. Because the general trend in Parliament is that the Chamber that receives a tax bill second is the one that studies it less, one is left to hope without confidence that the House will undertake its due diligence.
There is cause for concern with C-82. Unlike the other tax treaty implementing bills I studied, this was preceded by a ways and means motion that provided the text of the bill in advance. In other words, the Minister of Finance tabled a notice on May 28th that contained essentially what would become C-82. But, rather than debate the Notice, the House on June 19th deemed that motion agreed to and further deemed the BEPS bill formally introduced.
Without venturing too far into the procedural weeds, it is perhaps sufficient to observe that there could have been a debate on that ways and means motion. Instead, the decision in June deemed this motion adopted ‘on division’ – that is, dissent is indicated for the record but we don’t know who disagreed or on what basis because there was no actual debate on the record.
This leads me to wonder whether we’ll see an actual debate occur on the merits of C-82 if even its introduction was fast-tracked through deeming. I doubt it. After all, MPs (and Senators alike) often find tax matters confusing and technical. Maybe in this case especially, the whole things seems like a foregone conclusion since we are talking about an OECD initiative in which Canada has been involved over many years. Moreover, Canada's undertakings in the MLI are modest to say the least. Even so, that doesn’t mean these bills don’t deserve careful study since it is agreed that certain tax arrangements erode Canada’s tax base (cf: the recently decided Alta Energy case). It is much harder (and more costly) to re-negotiate and re-legislate (if need be) a treaty than to get things right the first time (for a discussion, see See Charlie Feldman, “Parliamentary Practice and Treaties” (2015) 9 J. Parliamentary & Pol. L. 585). Adopt in haste, repent at leisure ought to be a mantra for tax treaties.
Unfortunately, Canada's Parliament has limited involvement in the treaty process and only so much influence over treaty-implementing legislation. An additional concern is that there is only so much time left in the legislative calendar with an election a year away. The government has important pieces of legislation moving – including implementing the TPP, adopting the first-ever national legislation on accessibility, and an election law overhaul that the government has already tried to fast-track. Moreover, of the 366 commitments the Trudeau government has made, the government’s own analysis indicates that just 96 have thus far been met. Many others also
Moreover, Parliament already has many bills to consider which have yet to complete the legislative process. Parliament's Legislation-at-a-glance page shows just how much each House has before it already, including criminal justice and family law reforms, firearms regulation, and military justice changes remaining in the House, and many big legislative matters before the Senate including bills on sustainable development, access to information, and fisheries reform. While the BEPS bill could be a step ahead of bills yet to come, it is easy to imagine easier-to-debate matters (such as labour reforms) getting much more debate in the House and, if and when it does get to the Senate, that body will be even more pressed for time given all the other items from the House being added to its plate.
Tagged as: BEPS Canada MLI scholarship
I'm very happy to announce the 2018 McGill Tax Policy Colloquium, which will take an interdisciplinary approach to tax policy analysis. The colloquium is made possible by a grant from Spiegel Sohmer. The land on which we gather is the traditional territory of the Kanien’keha:ka (Mohawk), a place which has long served as a site of meeting and exchange amongst nations. The distinguished speakers who will contribute to this year’s colloquium include:
- Oct 22: Sam Singer, Assistant Professor, Faculty of Law, Thompson Rivers University. Prof. Singer's research focuses on tax dispute resolution, the policy rationales underlying tax measures, and the regulation of charities and charitable giving.
- Nov 12: Lindsay Tedds, Scientific Director of Fiscal and Economic Policy and Associate Professor, Department of Economics, University of Calgary. Dr. Tedds’ research focuses on tax policy and she has done extensive work with the Government of Canada in the areas of public economics and policy implementation.
- Nov 19: Laurens van Apeldoorn, Assistant Professor of Philosophy, Leiden University. Prof. Van Apeldoorn’s research examines the nature and prospects of the sovereign state, with a special focus on the normative aspects of international taxation rules in relation to the global justice.
- Nov 26: Frances Woolley, Full Professor, Department of Economics, Carleton University and President, Canadian Economics Association. Prof. Wooley’s expertise and research focus on economics of the family, gender and intra-house inequality, taxation and benefits for and of families, and feminist economics.
- Dec 3: Ruth Mason, Full Professor, School of Law, University of Virginia. Prof. Mason’s research focuses on international, comparative, and state taxation. Her work on tax non-discrimination laws’ effect on cross-border commerce has been cited extensively, including by the U.S. Supreme Court.
Tagged as: colloquium McGill scholarship tax policy
MNCs and their advisors have seemingly taken ethics out of the mix when considering the profit-shifting tax structures they have so prolifically and enthusiastically implemented over the past several decades. ... Given the strong motivation to implement such structures, a counterweight is needed to balance the unfettered acceptance and adoption of profit-shifting strategies based solely on the mere possibility that they might pass technical tax scrutiny by the government. Greater thought needs to be given to whether these plans are consistent with and serve the long term objectives of the MNC and its many global stakeholders. Stating this proposition more directly, it is time to ask if all of these stakeholders would accept the efficacy of these structures if they were made fully aware of and understood the technical basis, the strained interpretations, the hidden arrangements, the meaningless intercompany agreements, the inconsistent positions, and the lack of change in the business model for the schemes proposed or already implemented.
This article presents an objective ethical benchmark to test the acceptability of certain profit shifting structures. ... In brief, this ethical benchmark requires an examination of the factual situation for each of an MNC’s low or zero taxed foreign group members regarding three factors, which are:
(a) identification and location of critical value-drivers,(b) location of actual control and decision-making of the foreign group member’s business and operations, and(c) the existence or lack thereof of capable offshore management personnel and a CEO located at an office of the foreign group member ... who has the background and expertise to manage, and does in fact manage, the entity’s business.
Through this examination, it should be possible to determine whether a foreign group member is recording income that is economically earned through business decisions and activities conducted in the jurisdiction in which it claims to be doing business. ... This benchmark should be used by MNCs with the active participation of board and management members. An MNC could also use this approach to proactively respond to critics or to demonstrate its tax bona-fides.The article contributes to an ongoing discourse about how states can tax multinationals effectively, and how tax planning decisions should be assessed, in a world of global capital mobility and flexible commercial structures.
Tagged as: BEPS corporate tax scholarship tax policy
We invite paper proposals for a Tax Justice and Human Rights Research Collaboration Symposium, to be held at the McGill Faculty of Law, Montreal, Quebec, from Wednesday to Friday, 18-20 June 2014.
Tagged as: conference fairness human rights justice McGill Tax law tax policy
- FATCA is the Foreign Account Tax Compliance Act. It is law in the United States, enacted as part of the Hiring Incentives to Restore Employment Act, (HIRE Act), which was signed into law by President Obama on March 18, 2010. (It is found at §§ 501-531, Pub. L. No. 111-147, 124 Stat. 71 (2010). It has been codified in scattered sections of the Internal Revenue Code.
- In brief, the law requires foreign financial institutions (broadly defined) to identify any of their accounts (also broadly defined) held by "US persons" (expansively defined) and then furnish the US with periodic reports on those accounts including identifying information and amounts of transfers in and out of the accounts. Targeted institutions that fail to comply are to be penalized with a 30% toll charge on all of their US-source payments (again expansively--not just payments connected to targeted accounts).
- There are numerous rules and exceptions and exceptions to the exceptions applicable to the above statement.
- "US person" includes everyone in the world who is a US citizen, whether or not that person lives or has ever lived in the US and whether or not that person is also a citizen of somewhere else. The US is the only country in the world that taxes its citizens on this basis. Citizenship-based taxation violates the membership principle as well as the global standard of residence-based taxation, and has therefore been denounced as unjust or bad economic policy or both by most academics, including Reuven Avi-Yonah and myself among others.
- The US considers any account to be foreign if it is not in the US, so for people who live in other countries, their neighbourhood bank where they have their checking account in the local currency is "foreign."
- The HIRE Act was a jobs bill that included payroll tax holidays and other credits for employers. FATCA was unrelated to this purpose, but was included in the form of revenue-raising “Offset Provisions”. The Chair of the House Budget Committee claimed that the HIRE Act was a responsible piece of legislation that “was fully paid for… by cracking down on overseas tax havens." Congressional Record (4 March 2010) page H1152 (statement of Sen. Allyson Schwartz). However, no cost-benefit analysis appears to have been undertaken, and pursuant to CBO projections, the sums to be raised under FATCA could do little by way of offset, even if they were fully implemented (see below, What is the cost/benefit of FATCA).
- The placement as a revenue raiser tacked onto a bill aimed at unrelated objectives has been viewed by opponents of FATCA as a sign that its passage was undertaken with some degree of stealth. See, e.g., Recovery Partners, “FATCA: The Empire Strikes Back” (4 July 2011); Koshek Rama Moorthi, “FATCA: Obama’s New Year Surprise Against American Expats” (30 November 2012), The Examiner; American Citizens Abroad, “ACA’s Voice in the News” (October 2012) online. The addition of unrelated riders and last minute addenda, especially revenue raisers, is a standard feature of US lawmaking, though it may appear anomalous to observers from other countries. For a brief discussion of how reconciliation and pay-as-you-go rules and standards affect tax policymaking in the US, see Center on Budget and Policy Priorities, “Policy Basics: Introduction to the Federal Budget Process” (3 January 2011).
- Presented as a revenue offset at the tail end of a long, complex, and contested piece of legislation did allow FATCA to pass with minimal debate or discussion in 2010. But the seeds for FATCA had been sown in earlier (failed) legislative attempts, both in Senator Levin’s Stop Tax Haven Abuse Act of 2009 and Senator Baucus’ stand-alone FATCA Act of 2009. See Carl Levin, “Summary of the Stop Tax Haven Abuse Act” (2 March 2009); H.R. 3933 (111th): Foreign Account Tax Compliance Act of 2009 (27 October 2009); See also Douglas Shulman, “Prepared Remarks of Commissioner Douglas Shulman before the 22nd Annual George Washington University International Tax Conference” (10 December 2012) (stating that “the Administration and the IRS are focused on a multi-year international tax compliance strategy…to put a serious dent in offshore tax evasion” and expressing support for the FATCA Act of 2009).
- The clear impetus for FATCA was the UBS scandal, involving thousands of bank accounts held in Switzerland by Americans living in the United States. It seems clear the target was rich tax cheats who live in America but don't want to pay taxes there, and who have been helped in that quest via unscrupulous sales pitches by offshore bankers offering banking secrecy as a shield against taxation by the USA. The legislation failed twice as stand alone bills (see above), and was tacked on to another, unrelated bill in 2010 (the HIRE act) as a revenue raiser, without any discussion or much analysis by US legislators. Many appear to have never even heard of FATCA.
- A lot of people seem to think FATCA was intended to smoke out and punish Americans who live permanently in other countries and who have not kept up with their US tax obligations out of ignorance or otherwise. I do not think that is the case. I think these Americans have become collateral damage of FATCA.
- To my knowledge, no cost analysis has been undertaken with respect to FATCA.
- Amounts expected to be raised by FATCA were projected to be $343 million, $448 million, and $710 million, for 2010, 2011, and 2012, respectively. See Congressional Budget Office (18 February 2010) “Letter and Table Outlining Budgetary Effects of HIRE Act” ). The HIRE Act was expected to produce a revenue deficit in the amount of $4,380,000 despite the bold claim that it was "was fully paid for… by cracking down on overseas tax havens." See Congressional Record (15 April 2010) page S2368 “Budget Scorekeeping Report: Table 2: Supporting Detail for the Current Level Report for On-Budget Spending and Revenues for Fiscal Year 2010, as of April 9, 2010.
- This precarious budgetary situation was aggravated by the fact that while the spending provisions of the HIRE Act were apparently immediately implemented, most of the FATCA provisions have yet to be enforced. For example, the disclosure of US accounts by foreign financial institutions was, according to the statute, to begin after December 2012, but the enforcement has been delayed more than once. See IRS, “Notice 2012-42” (24 October 2012) (which delayed the implementation of information reporting until 31 March 2015 and gross withholding until 1 January 2017); see also chart of initial and revised implementation times, DLA Piper, “Comparison of FATCA Timeframes” (October 2012).
- I have not found any information about whether any amount of taxes or penalties has been collected pursuant to FATCA to date.
- An IGA is an "intergovernmental agreement." The US has been signing these with some countries and is looking to sign a lot more with a lot more countries.
- There are two categories of IGAs. In one category, the foreign country agrees to change whatever domestic law exists that might bar their financial institutions from complying with FATCA (e.g., consumer privacy protection laws). In the other category, the foreign country agrees to act as intermediary, collecting the info the US wants and handing it over as a government-to-government exchange. This typically bypasses any privacy protection regimes that might exist as people don't generally have privacy protection as against their own government's tax authority.
- IGAs are from the US perspective, in fact, just what exactly they are is a mystery. Treasury has implied that to the extent the US undertakes anything in these IGAs (in fact, precious little), they are "interpretive" in nature that is, they interpret existing tax treaties. Hence perhaps some confusion: if a country wants an IGA which involves the US providing anything in return, Treasury is suggesting a treaty will be needed for the IGA to "interpret." In my own view the idea that IGAs are interpretive in nature is a stretch: IGAs look like sole executive agreements to me. Treasury will not be putting them through any ratification procedures. Other countries have been typically (but not universally) treating these as they are, which is to say they are new treaties that require internal ratification procedures to place in force.
- In general the purpose of the IGA is to override the statutory structure of FATCA, making the unilateral statute less onerous than it otherwise would be, and to overcome domestic consumer privacy protections to enable institutions in other countries to pass personal financial information to the IRS. Thus, IGAs are a way of reducing both the administrative and the political burden Congress created for Treasury with FATCA.
- I can only speculate on this as I am not a compliance expert. However, it is to be expected that at minimum, compliance costs and risk of penalty from the US goes up, and if other counties implement their own regimes as the UK is currently doing, the costs and risks will be multiplied.
- It seems to me possible that financial institutions face litigation risk with respect to customers who are mistakenly identified as having US indicia and whose information is turned over to the IRS, or whose accounts are closed, or who are asked for personal information that is not required to be asked or not allowed to be shared with third parties under domestic banking laws, whatever those may be. It seems possible that this risk might make an IGA seem more palatable than direct compliance with FATCA, from the perspective of a financial institution.
How will FATCA impact consumers?
- Again I can only speculate, based on what people tell me.
- First, a generalized fear seems to be setting in about US surveillance and a powerful and determined IRS that is interested in imposing, anywhere it can, enormous penalties all out of proportion to any taxes that might have been owed. The US Taxpayer's Advocate has expressed dismay at this state of affairs.
- Second, it is likely that everyone will see increased costs for financial services across the globe, even for those with no ties to the US of any kind, as compliance will have to be done on every account and institutions can be expected to pass on these costs in the form of higher fees and charges.
- Third, it seems that data security risks rise as bulk data including social security numbers, account numbers, financial transactions, and other personal information is collected and shared with the IRS. If the info will be shared with other US federal agencies, as Senator Levin has suggested ought to be the case, this seems to compound the data security risk.
- Fourth, there appears to be no remedy for error, compounding the problems noted above. If an institution flags a person as a "US person" in error, that person seems to be caught in a system with little or no review mechanisms in place. I am not sure how a person manages a case of mis-characterization.
- Finally tax compliance is extremely costly when you live in another country, so as more Americans try to get compliant the global personal compliance industry (e.g. tax accountants and lawyers with US expertise) stands to profit handsomely. This is another payoff in the form of rent seeking courtesy of the regulatory state. This is also a boon to the institutional compliance industry, i.e., software and systems designers, auditors, risk assessors, and so on, who will benefit from selling their products and services to financial institutions. It also seems to be a boon to people who know how to help one expatriate from the US--which is neither a straightforward nor cheap option.
- I cannot and do not give legal advice on this. I urge those who are or may be harmed by the injustice of US citizenship-based taxation on themselves, their children or parents or other loved ones, to contact their local government representatives and the senators and congress members of any state to which they have any ties in the USA, to tell their stories and ask why the USA wants to tax their children's education savings plans or other government-sponsored savings plans in the countries where they live, why it is in the interest of the US to make life so difficult for Americans and dual citizens who engage in small businesses in other countries, why the US is so hopelessly out of step with international standards which impose taxation based on actual residence rather than inherited nationality, and why the US expects all of its citizens no matter where they live to fulfill tax obligations yet withholds tax benefits that help the poorest, such as the earned income tax credit.
Tagged as: FATCA
I've been slowly working through a couple of manuscript reviews and in one of them I started thinking about the problem of fly-in expert consultation, i.e., the traditional model of tax experts from rich countries flying in to developing countries to assess the situation and provide advice for tax reforms. This was connected to a conversation I had on twitter last week about how to get needed research on technical tax policy alternatives accomplished, when donors and tax policy institutions like the OECD tend to focus on tax assistance that furthers rather than challenges the status quo. The dangers inherent in these paradigms include policy ossification helped along by ideological entrenchment, as well as the privileging of historical ideas about who ought to be considered an expert. Also relatedly, in a paper I am working on about tax governance and the problem of special interest group influence, I am thinking about how to create more policy space for alternative tax policy views from academics and non-governmental, non-industry groups--i.e., those without direct (pecuniary or otherwise) stakes in tax policy outcomes.
This brought me to thinking again that lending expertise upon demand (rather than pushing expertise onto others) is an appealing idea and I would like to see some sort of a matching program, through which interested academics, NGOs, and other non-industry, non-government experts could make themselves available to revenue officials, especially in poorer countries, to collaborate on reforms desired by the officials, for instance by reading reforms proposed by industry or legislators or commenting on drafts of proposed tax guidance and the like. It would be an interesting project in and of itself, mapping out and connecting areas of interest and expertise that are currently excluded from the established network of government-run tax policy institutions and otherwise fragmented by geography, resources, and institutions.
Coincidentally, after I recently posted a comment on twitter about how the US could take unilateral measures to curb global tax avoidance if it chose to do so, fellow twitterer @hselftax wrote, "the #AdoptanMP campaign aims to give tech tax info to UK MPs. Perhaps you need #AdoptASenator in US?" Fascinating idea! Here is a website that talks about it.
How might such a program be built transnationally and tailored to tax collaboration on request? It would need to be voluntary on both sides--i.e., folks who self identify areas they would be willing to consult on, together with disclosure of credentials and affiliations, and revenue officials who identify areas in which they are seeking outside expertise. Does such a platform already exist, i..e, on LinkedIn or elsewhere? Is there an app for this? I know that the OECD has created tax inspectors without borders, but what I have in mind is a slightly different model than official-to-official consultation.
Tagged as: expertise globalization institutions lobbying tax policy
Edward Abbey said “growth for growth’s sake is the ideology of the cancer cell":
Tagged as: culture expertise infographic
Tagged as: institutions international law rule of law scholarship
The scale of inequality and poverty can appear overwhelming and unchangeable. Yet it is not inevitable. It is the outcome of active choices by people who make and enforce the rules we all live by: rules about global trade, banking, loans, investment, taxes, working conditions, land, food, health and education. These rules are made by people and people can change them.
...Right now, there is a special moment of opportunity. Throughout the world, citizens have access to information in ways once unimaginable. Affordable technologies are revolutionising our ability to communicate with one another and act collectively. The opportunities for new citizen-powered movements to become catalysts for change have never been greater than today. Powerful elites are losing the structural advantages they once enjoyed of being able to maintain secrecy, restrict information and suppress popular movements.
Tagged as: inequality institutions rule of law social contract
William F. Hartman et ux. v. United States; No. 2011-5110
WILLIAM F. HARTMAN AND THERESE HARTMAN,
UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT
Appeal from the United States Court of Federal Claims
in case no. 05-CV-675, Judge Margaret M. Sweeney.
Decided: September 10, 2012
KENNETH R. BOIARSKY, Kenneth R. Boiarsky, P.C., of El Prado, New Mexico, 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.
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."1 I.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
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 US 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.
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 of intangible assets to be amortized pursuant to I.R.C. § 197.8
Following closing of the transaction, the value of Cap Gemini shares dropped drastically, from approximately $155 per share at closing to $56 per share by October 2001. Mr. Hartman voluntarily terminated his employment with CGE&Y on December 31, 2001.9 Upon his departure, Mr. Hartman forfeited 10,560 shares of his Cap Gemini stock and received a credit for the taxes he paid on those shares in his 2000 tax return pursuant to I.R.C. § 1341, which provides for the computation of tax where a taxpayer restores amounts previously held under a claim of right. In December 2003, the Hartmans filed an amended federal tax return for 2000, claiming that they had received only the 25% of Cap Gemini shares that had been monetized in the year 2000, with the remainder being received in 2001 and 2002. They sought a refund of $1,298,134. The Internal Revenue Service ("IRS") failed to act on the Hartmans' claim for a refund, and on June 21, 2005, the Hartmans filed suit in the Claims Court against the government seeking a refund of taxes paid for 2000.
The Claims Court found that the Hartmans had constructively received all 55,000 shares of Cap Gemini common stock in 2000, and that the Hartmans had properly reported the gain from the transaction on their income tax return for 2000 and thus were not entitled to a tax refund. Accordingly, the court granted summary judgment for the government, and the Hartmans timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3). We review "the summary judgment of the Court of Federal Claims, as well as its interpretation and application of the governing law, de novo." Gump v. United States, 86 F.3d 1126, 1127 (Fed. Cir. 1996).
The Hartmans' claim for a refund of taxes paid based on the transaction at issue in this case is not unique. Three courts of appeals have already squarely addressed the issue presented before us with respect to other similarly situated former E&Y accredited consulting partners. Each circuit to consider the transaction at issue here has concluded that the taxpayers were not entitled to a refund of taxes paid in 2000. See United States v. Fort, 638 F.3d 1334 (11th Cir. 2011); United States v. Bergbauer, 602 F.3d 569 (4th Cir. 2010); United States v. Fletcher, 562 F.3d 839 (7th Cir. 2009).10 As it argued before the Claims Court and the Fourth, Seventh, and Eleventh Circuits, the government contends that the Hartmans are not entitled to a tax refund for two reasons.
First, the government argues that under the "Danielson Rule," the Hartmans may not disavow receipt of the Cap Gemini shares in 2000 after having agreed to be bound by the Master Agreement which required them to recognize the shares as received in 2000 for the purposes of their federal income tax returns. The "Danielson Rule" takes its name from Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967) (en banc), cert. denied, 389 U.S. 858 (1967), where the rule was described:
[A] party can challenge the tax consequences of his agreement as construed by the Commissioner [of Internal Revenue] only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc.
Id. at 775. Our predecessor court expressly adopted the Danielson Rule, see Proulx v. United States, 594 F.2d 832, 839-42 (Ct. Cl. 1979); Dakan v. United States, 492 F.2d 1192, 1198-1200 (Ct. Cl. 1974), and we have consistently applied the rule in subsequent cases involving "stock repurchase agreements which contain express allocations of monetary consideration between stock and non-stock items," Lane Bryant, Inc. v. United States, 35 F.3d 1570, 1575 (Fed. Cir. 1994); see Stokely-Van Camp, Inc. v. United States, 974 F.2d 1319, 1325-26 (Fed. Cir. 1992).11
Here, the government seeks to extend the Danielson Rule to situations where the taxpayer agrees, not to the allocation of consideration, but to a particular tax treatment for the consideration, i.e., when the consideration is received by the taxpayer. Although the Claims Court recognized the Danielson Rule as "binding" in this circuit, it concluded that the rule is limited only to situations where "a taxpayer challenges express allocations of monetary consideration," rather than a situation where, as in this case, a taxpayer challenges how a transaction should be treated for tax purposes, and refused to apply the rule. Hartman, 99 Fed. Cl. at 181-82 (internal quotation mark omitted). In this appeal, it appeared that the parties differed as to whether the Hartmans were obligated under an agreement with Cap Gemini to report the shares of Cap Gemini stock as received in 2000, and we requested and received supplemental briefing on that issue.
Second, the government contends that, although the shares were not actually received in 2000, Mr. Hartman nonetheless constructively received the shares in accordance with Treas. Reg. § 1.451-2. In addressing this issue, the Claims Court noted that "while the shares were held in the restricted account, Mr. Hartman could vote them and receive dividends from them," and therefore, "Mr. Hartman received all of the shares, for tax purposes, in 2000, when they were issued to him by Cap Gemini." Hartman, 99 Fed. Cl. at 187. The court further reasoned that "[t]he control that Mr. Hartman exercised over his Cap Gemini stock in 2000 was not defeated by the monetization restrictions and forfeiture conditions described in the transaction documents," because "Mr. Hartman voluntarily agreed to accept his share of the transaction proceeds with these limitations." Id. at 185. Thus, the Claims Court concluded that the shares of Cap Gemini stock were constructively received by Mr. Hartman in 2000.
Because we agree that Mr. Hartman "constructively received" the Cap Gemini shares in 2000 under the Treasury Regulations, we need not reach the questions of whether the agreements did in fact require the Hartmans to report the shares as received in 2000, and if so, whether the Danielson Rule could apply to situations where parties agree to a particular tax treatment.
The constructive receipt issue turns on the interpretation of the constructive receipt regulation, Treas. Reg. § 1.451-2, and whether, under that regulation, Mr. Hartman constructively received all of his allocated shares of Cap Gemini stock in 2000.
We note initially that although the accredited consulting partners' right to "sell, assign, transfer, pledge, grant any option with respect to or otherwise dispose of any interest" in the Cap Gemini common stock was restricted, the Cap Gemini shares here were set aside for each accredited consulting partner in a Merrill Lynch account in each partner's name, and the partners were able to receive dividends from and vote the shares (though subject to a power of attorney) during the period of time in which the sale of the shares was restricted. The risk of a decline in the value of the shares and the benefits of any increase in the value of the shares accrued entirely to the accredited consulting partners. Under the agreement, the shares immediately vested in the partners to ensure that the shares would not be treated as deferred compensation for future services.12 Thus, the benefit of ownership of the Cap Gemini stock to each accredited consulting partner extended far beyond "the mere crediting [of the stock] on the books of the corporation."13
It appears that the Hartmans make three arguments with respect section 1.451-2 of the Treasury Regulations. First, relying on the "or otherwise made available so that he may draw upon it at any time" language in the regulation, the Hartmans contend that the Cap Gemini shares were not constructively received when placed into Mr. Hartman's restricted account because he could not access them under the provisions of the Partner Agreement. But, as the government points out, constructive receipt extends to many situations in which the taxpayer cannot immediately draw upon the account. The quintessential example of constructive receipt covers the situation in which a taxpayer cannot, by his own agreement, presently receive an asset. See Goldsmith v. United States, 586 F.2d 810, 815 (Ct. Cl. 1978) ("[U]nder the doctrine of constructive receipt a taxpayer may not deliberately turn his back upon income and thereby select the year for which he will report it.").
Second, the Hartmans argue alternatively that at the time that Mr. Hartman entered into the Partner Agreement, he was not presented with the alternative option of receiving the assets free of restriction. But as discussed below, the existence of an opportunity to receive the assets at the time of escrow creation, i.e., free of all restrictions, is not a necessary requirement for constructive receipt. There is constructive receipt if the taxpayer exercised substantial control over the escrow account. Finally, the Hartmans urge that even if they are wrong as to their first two arguments, the accredited consulting partners did not have sufficient control over the shares to constitute constructive receipt. Relying on section 1.451-2 of the Treasury Regulations and our interpretation of that regulation in Patton v. United States, 726 F.2d 1574 (Fed. Cir. 1984), the Hartmans contend that Patton held that there is no constructive receipt where a third party controls the right to receive the shares (or certificates). This last argument warrants some discussion.
In Patton, a subchapter S corporation determined to make a $346,000 distribution to its shareholders.14 Because of its insolvency, the corporation was unable to make the distribution to the shareholders from its own funds and had to borrow the $346,000 to distribute to its shareholders. Id. at 1575-76. The corporation secured a loan from the bank and then purchased three certificates of deposit in the names of its shareholders (two for $115,000 and one for $116,000). Id. at 1576. The IRS claimed that the certificates represented dividend income to the shareholders in 1974, the tax year of the purchase of the certificates of deposit. The taxpayers claimed that the dividends would not be received until the certificates matured (upon the corporation's repayment of the $346,000 loan to the bank). The two $115,000 certificates were pledged as collateral for the loan, and thus "were never set aside for the individual benefit of the shareholders, but remained in the custody and control of the bank as collateral," and could not "have [been] delivered . . . to the shareholders had they so demanded." Id. (internal quotation marks omitted). The third certificate was made payable to the shareholders such that they could pay their federal income taxes on the distributed income. Id. On its federal income tax return for the year in which the certificates were purchased, the corporation reported that all the income had been distributed, while the shareholders failed to report receipt of any of the certificates as taxable income. Id.
We held that, while the third certificate was income to the shareholders, the two pledged certificates of deposit were not "constructively received" by the shareholders, reasoning:
Although the [shareholders] may have become the owners of the [pledged] certificates of deposit when the bank issued the certificates . . . in the name of the [shareholders] . . . , at that time the certificates were not "unqualifiedly made subject to their demands" and the [shareholders] did not constructively receive them. . . . The [shareholders] did not constructively receive the certificates because, except for the receipt of the interest from the certificates, the [shareholders] could not have obtained or directed the distribution of the certificates.
Id. at 1577. We further noted that "it was far from certain that the [shareholders] ever would obtain the certificates, since the corporation's financial condition might result in its default on the loan and the bank's consequent foreclosure of the pledge of the certificates," id., and "[t]he control and authority of the bank over the certificates of deposit . . . constituted 'substantial limitations or restrictions' upon the appellants' control over receipt of the certificates," id. at 1578.
The Hartmans contend that, as in Patton, Mr. Hartman did not constructively receive the shares of Cap Gemini stock in 2000 (except for those shares that were monetized) because his receipt of the shares was subject to "substantial limitations or restrictions," i.e., the distribution of the shares was within the control of a third party.
However, the Hartmans' reliance on Patton is misplaced. Two significant features distinguish this case from Patton. First the restrictions were imposed by the taxpayer's own agreement and not by an agreement between the distributing corporation and a third party (the bank in Patton). Unlike Patton, Mr. Hartman and the other accredited consulting partners agreed to condition receipt of their shares on satisfaction of their own contractual obligations under the Partner Agreement and their employment contracts with CGE&Y. Under such circumstances, Mr. Hartman cannot now be heard to complain that such restrictions undermine his constructive receipt of the shares. The Claims Court rightly found that "Mr. Hartman voluntarily agreed to accept his share of the transaction proceeds with these limitations." Hartman, 99 Fed. Cl. at 185. The fact that Mr. Hartman voluntarily agreed to subject himself to the restrictions imposed by the Partner Agreement cannot defeat constructive receipt. See Soreng v. Comm'r, 158 F.2d 340, 341 (7th Cir. 1947) ("We can discern no rational basis for a holding that the dividends received by the [taxpayers] are not includable in gross income merely because they or [sic] their own accord entered into a contract with a third party as to the manner of their disposition when received."). As the Fourth Circuit in Harris v. Commissioner, 477 F.2d 812, 817 (4th Cir. 1973), noted when interpreting section 1.451-2 of the Treasury Regulations, "[s]ale proceeds, or other income, are constructively received when available without restriction at the taxpayer's command; the fact that the taxpayer has arranged to have the sale proceeds paid to a third party and that the third party is, with taxpayer's agreement, not legally obligated to pay them to taxpayer until a later date, is immaterial."
Second, under the Partner Agreement, the conditions that could result in forfeiture were within the control of the accredited consulting partners themselves rather than within the control of Cap Gemini. In Patton, the shareholders had no control over their receipt of the certificates, and indeed may have never received them, due only to the corporation's failure to comply with its obligations to the bank, not due to any obligations of their own. Here, each partner had direct control over whether the shares would later be forfeitable. See Fort, 638 F.3d at 1341. The forfeited shares were characterized in the agreement as "liquidated damages," and were forfeitable only where partner breached his employment contract, left CGE&Y voluntarily, or was terminated for cause or poor performance, all circumstances over which the accredited consulting partners exercised control. See J.A. B-628.
Although the Hartmans contend that the determination of "poor performance" was within the control of Cap Gemini, the Hartmans have pointed to no evidence in the record to suggest that the "poor performance" clause could be utilized to terminate employees due to circumstances outside of the employees' control.15 As the Eleventh Circuit recently noted, "the plain meaning of being terminated for 'poor performance' is not being terminated for any reason at all. Rather, poor performance clearly refers to unsatisfactory performance. It would be a strained interpretation . . . to hold that 'poor performance' does not really mean poor performance, but actually means 'any reason at all.'" Fort, 638 F.3d at 1342.
Other circuits, even before the Cap Gemini controversy, have held that where restrictions on receipt are imposed in order to guarantee performance under a contract, the income is nonetheless received when set aside for the taxpayer. See Chaplin v. Comm'r, 136 F.2d 298, 301-02 (9th Cir. 1943); Bonham v. Comm'r, 89 F.2d 725, 727-28 (8th Cir. 1937).16
In Chaplin, Chaplin, an artist, received two certificates of stock (167 shares each) in United Artists Corporation ("United") in 1928; however the certificates were immediately placed in escrow until 1935. 136 F.2d at 299. Under the terms of an agreement between Chaplin and United, Chaplin was required to deliver five motion picture photoplays to United. Id. at 301. Upon delivery of each photoplay, one fifth of the shares held in escrow were to be released to Chaplin. Id. The Ninth Circuit held that the United shares had been received by Chaplin when they were placed into escrow. Specifically, the court reasoned that "[o]ne nonetheless owns personal property because held by another to insure the performance of a contract." Id. at 302. Similarly, in Bonham, the Eighth Circuit held that where "stock was issued, the title passed then to [taxpayer], and the stock was retained as a pledge" to guarantee performance, the shares were taxable in the year that title passed to the taxpayer. 89 F.2d at 727.
The Hartmans contend that Chaplin and Bonham are inapplicable here because those cases were decided before the adoption of the constructive receipt regulation at issue here. See Republication of Regulations, 25 Fed. Reg. 11,402, 11,710 (Nov. 26, 1960) (to be codified at 26 C.F.R. pt. 1). However, nothing in the regulatory history of section 1.451-2 indicates that the IRS intended to overrule the holdings of Chaplin and Bonham, and indeed, Chaplin and Bonham are consistent with the regulation. Notably, the IRS General Counsel Memorandum, issued after adoption of the constructive receipt regulation, cited Chaplin and Bonham with approval, noting that where "the taxpayer exercises a considerable degree of domination and control over the assets in escrow, the courts and the Service have generally held . . . that income is presently realized notwithstanding that the taxpayer lacks an absolute right to possess the escrowed assets." See I.R.S. Gen. Couns. Mem. 37,073 (Mar. 31, 1977). The language of the regulation is consistent with those cases, providing that "income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions," i.e. that the "control" over receipt lies with a third party and not with the taxpayer. Treas. Reg. § 1.451-2(a) (emphasis added). In both Chaplin and Bonham, it was the taxpayer's conduct that determined whether he would receive the stock at issue, not a decision by a third party. The stock in Chaplin and Bonham was to be released to the taxpayer upon fulfillment of his contractual obligation, over which he exercised complete control. See Chaplin, 136 F.2d at 302; Bonham, 89 F.2d at 727-28.
We agree with the Seventh Circuit that here "[t]he sort of contingencies that could lead to forfeitures were within the expartners' control. That implies taxability in 2000, for control is a form of constructive possession." Fletcher, 562 F.3d at 845; see also Fort, 638 F.3d at 1342 ("[C]onstructive receipt was not impossible simply because [taxpayer] was required to forfeit the shares upon the occurrence of certain conditions, because [taxpayer] had sufficient control over whether those conditions would occur."). By agreeing to condition release of the shares on continued employment with the corporation (a contractual obligation, satisfaction of which only he controlled), Mr. Hartman exercised control over his receipt of the shares.
In summary, under Mr. Hartman's own agreement, the Cap Gemini shares were "set aside" for Mr. Hartman in a brokerage account. Mr. Hartman received dividends from and was entitled to vote the shares in the year 2000. Mr. Hartman exercised control over his receipt of the Cap Gemini shares under the forfeiture provisions of the Partner Agreement. In light of these attributes of dominion and control, we conclude that Mr. Hartman constructively received all 55,000 shares of Cap Gemini common stock in 2000 when they were placed into his restricted account to guarantee his performance under his contractual obligations.
The Claims Court's decision granting summary judgment to the government on the Hartmans' claim for a refund of federal income taxes paid in 2000 is affirmed.
1 See Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 713 (2011) ("The principles underlying our decision in Chevron apply with full force in the tax context. . . . Filling gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation at least as complex as the ones other agencies must make in administering their statutes. We see no reason why our review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as our review of other regulations." (citing Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984))).
2 Although the transaction at issue in this case (the sale of E&Y's consulting business to Cap Gemini) involves only Mr. Hartman, both Mr. and Mrs. Hartman filed suit for a refund of taxes paid based on the transaction, as they filed a joint tax return in 2000.
3 The monetization schedule was later modified from annual scheduled offerings to "a more flexible approach that allows one or more transactions over the course of each year." J.A. B-682.
4 The applicable forfeiture percentages were 75% prior to the first anniversary of closing; 56.7% prior to the second anniversary of closing; 38.4% prior to the third anniversary of closing; 20% prior to the fourth anniversary of closing; and 10% prior to the fourth anniversary of closing plus 300 days. At four years and 300 days following closing, the Cap Gemini shares were no longer subject to forfeiture.
5 Where a partner was terminated for "poor performance," a review committee comprised of senior executives selected by CGE&Y would determine an appropriate amount of forfeiture between 50% and 100% of the applicable forfeiture percentage.
6 The Partner Agreement further provided that the accredited consulting partners "acknowledge [their] obligation to treat and report the Transaction for all relevant tax purposes in the manner provided in . . . the Master Agreement." J.A. B-624.
7 IRS Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, is the tax form on which sales or redemptions of securities, futures transactions, commodities, and barter exchange transactions are reported.
8 Cap Gemini was later audited by the IRS, which conducted an examination of the transaction between Cap Gemini and E&Y, but did not make any adjustments to the tax treatment of the transaction.
9 Although Mr. Hartman ceased performing any duties for CGE&Y on December 31, 2001, he was permitted to remain an employee of CGE&Y through May 24, 2002 (following the second anniversary of closing) to allow him to reduce his applicable forfeiture percentage from 56.7% to 38.4%.
10 Several district courts have also reached the same conclusion. See, e.g., United States v. Fort, No. 1:08-CV-3885, 2010 WL 2104671 (N.D. Ga. May 20, 2010), aff'd, 638 F.3d 1334 (11th Cir. 2011); United States v. Nackel, 686 F. Supp. 2d 1008 (C.D. Cal. 2009); United States v. Berry, No. 06N-CV-211, 2008 WL 4526178 (D.N.H. Oct. 2, 2008); United States v. Bergbauer, No. RDB-05R-2132, 2008 WL 3906784 (D. Md. Aug. 18, 2008), aff'd, 602 F.3d 569 (4th Cir. 2010), cert. denied, 131 S. Ct. 297 (2010); United States v. Fletcher, No. 06 C 6056, 2008 WL 162758 (N.D. Ill. Jan. 15, 2008), aff'd, 562 F.3d 839 (7th Cir. 2009); United States v. Culp, No. 3:05-cv-0522, 2006 WL 4061881 (M.D. Tenn. Dec. 29, 2006).
11 For tax purposes, monetary consideration allocated to the purchase of stock is treated differently from monetary consideration allocated to the purchase of non-stock intangibles such as a covenant not to compete. While the amount allocated towards the purchase of stock is taxed as a capital gains transaction, "the amount a buyer pays a seller for [ ] a covenant [not to compete], entered into in connection with a sale of a business, is ordinary income to the covenantor and an amortizable item for the covenantee." Danielson, 378 F.2d at 775.
12 The Hartmans rely on cases where income was placed in escrow or in trust with the understanding that specified amounts would be released to the taxpayer for performance of future services. These cases hold that, where the taxpayer could not elect immediate receipt, the income was not constructively received when placed in escrow. See, e.g., Drysdale v. Comm'r, 277 F.2d 413 (6th Cir. 1960) (compensation paid by employer to trustee to be released to employee upon satisfaction of contractual employment obligations was not constructively received by employee until released). However, in the present case, the Hartmans (understandably) do not contend that the Cap Gemini shares held in the restricted accounts represent payment for Mr. Hartman's services in CGE&Y, since such an arrangement would result in taxation of the shares as ordinary income rather than as capital gains.
13 The constructive receipt regulation states that "if a corporation credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt." Treas. Reg. § 1.451-2(a).
14 A "subchapter S corporation" is a small business corporation established under subchapter S of the Internal Revenue Code, I.R.C. §§ 1361-1379, in which "each shareholder is taxed upon his or her share of the corporation's income." Patton, 726 F.2d at 1575.
15 Indeed, testimony presented before the Claims Court indicated that where employees were terminated due to a reduction in force (which was based on business necessity rather than performance), they did not forfeit any shares. See J.A. C-494-95.
16 See also Fort, 638 F.3d at 1339 (citing Chaplin and Bonham); Fletcher, 562 F.3d at 844 (same).