Hartman v. United States ( 2012 )

United States Court of Appeals
for the Federal Circuit
__________________________
WILLIAM F. HARTMAN AND THERESE
HARTMAN,
Plaintiffs-Appellants,
v.
UNITED STATES,
Defendant-Appellee.
__________________________
2011-5110
__________________________
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 Litiga-
tion 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.
__________________________
HARTMAN v. US 2
Before DYK, O’MALLEY, and REYNA, Circuit Judges.
DYK, Circuit Judge.
William F. Hartman and Therese Hartman (collec-
tively, “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.
BACKGROUND
This case requires an interpretation of the Treasury
Regulations governing the constructive receipt of income,
which in turn interprets section 451 of the Internal Reve-
nue 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
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))).
3 HARTMAN v. US
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 inten-
tion 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 restric-
tions.” Id. § 1.451-2(a).
The question here is whether Mr. Hartman construc-
tively 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
I
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 consult-
ing business to CGE&Y in exchange for interest in
CGE&Y. Each accredited consulting partner in E&Y,
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.
HARTMAN v. US 4
including Mr. Hartman, would then receive a proportion-
ate 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 ex-
change 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 con-
sulting 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 Trans-
action 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 indi-
vidual 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 Agree-
ment”). J.A. B-627. The Shareholders Agreement pro-
vided for an initial sale of 25% of the shares held by each
5 HARTMAN v. US
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 percent-
ages 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 begin-
ning on January 1, 2000, without restriction. The divi-
dends 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 percent-
ages of the shares would be forfeited if the accredited
consulting partner (1) breached his employment contract
3 The monetization schedule was later modified
from annual scheduled offerings to “a more flexible ap-
proach 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 anniver-
sary of closing; and 10% prior to the fourth anniversary of
closing plus 300 days. At four years and 300 days follow-
ing closing, the Cap Gemini shares were no longer subject
to forfeiture.
HARTMAN v. US 6
with CGE&Y; (2) left CGE&Y voluntarily; or (3) was
terminated for cause. Id. Additionally, where the accred-
ited consulting partner was terminated for “poor perform-
ance,” 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.
5 Where a partner was terminated for “poor per-
formance,” a review committee comprised of senior execu-
tives selected by CGE&Y would determine an appropriate
amount of forfeiture between 50% and 100% of the appli-
cable 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 Bar-
ter Exchange Transactions, is the tax form on which sales
or redemptions of securities, futures transactions, com-
modities, and barter exchange transactions are reported.
7 HARTMAN v. US
II
In early March of 2000, E&Y held a meeting in At-
lanta 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 Docu-
ment, dated March 1, 2000, to its partners which summa-
rized the Master Agreement and Partner Agreement, and
purported to explain the tax consequences of the transac-
tion as set forth in those agreements. The Partner Infor-
mation Document provided that “[t]he sale of Consulting
Services to Cap Gemini is a taxable capital gains transac-
tion,” 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 consult-
ing 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 depos-
ited into his restricted account. Twenty-five percent of
Mr. Hartman’s Cap Gemini shares (necessary for pay-
ment 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.
HARTMAN v. US 8
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 Agree-
ment (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 intangi-
ble assets to be amortized pursuant to I.R.C. § 197. 8
III
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 employ-
ment 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
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 HARTMAN v. US
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 con-
structively received all 55,000 shares of Cap Gemini
common stock in 2000, and that the Hartmans had prop-
erly 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).
DISCUSSION
I
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 simi-
larly 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
9 Although Mr. Hartman ceased performing any du-
ties 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%.
HARTMAN v. US 10
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 “Daniel-
son 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 con-
struction 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
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. 06-CV-211, 2008 WL 4526178 (D.N.H. Oct. 2,
2008); United States v. Bergbauer, No. RDB-05-2132, 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 HARTMAN v. US
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 treat-
ment 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 mone-
tary 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.
11 For tax purposes, monetary consideration allo-
cated 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.
HARTMAN v. US 12
Second, the government contends that, although the
shares were not actually received in 2000, Mr. Hartman
nonetheless constructively received the shares in accor-
dance 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 mone-
tization 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.
II
The constructive receipt issue turns on the interpreta-
tion of the constructive receipt regulation, Treas. Reg. §
1.451-2, and whether, under that regulation, Mr. Hart-
man 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
13 HARTMAN v. US
option with respect to or otherwise dispose of any inter-
est” 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
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 corpo-
HARTMAN v. US 14
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 regula-
tion, 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 Agree-
ment, 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 re-
strictions, 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
ration does not constitute receipt.” Treas. Reg. § 1.451-
2(a).
15 HARTMAN v. US
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 con-
trols 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 sharehold-
ers, 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
14 A “subchapter S corporation” is a small business
corporation established under subchapter S of the Inter-
nal Revenue Code, I.R.C. §§ 1361-1379, in which “each
shareholder is taxed upon his or her share of the corpora-
tion’s income.” Patton, 726 F.2d at 1575.
HARTMAN v. US 16
all the income had been distributed, while the sharehold-
ers 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 [sharehold-
ers] 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 certifi-
cates.
Id. at 1577. We further noted that “it was far from cer-
tain that the [shareholders] ever would obtain the certifi-
cates, 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 restric-
tions’ upon the appellants’ control over receipt of the
certificates,” id. at 1578.
The Hartmans contend that, as in Patton, Mr. Hart-
man 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 distri-
17 HARTMAN v. US
bution of the shares was within the control of a third
party.
However, the Hartmans’ reliance on Patton is mis-
placed. 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 condi-
tion 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 construc-
tive 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 con-
structive 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 re-
ceived.”). As the Fourth Circuit in Harris v. Commis-
sioner, 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 tax-
payer’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
HARTMAN v. US 18
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 share-
holders had no control over their receipt of the certifi-
cates, 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 perform-
ance, all circumstances over which the accredited consult-
ing partners exercised control. See J.A. B-628.
Although the Hartmans contend that the determina-
tion 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 termi-
nated 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
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.
19 HARTMAN v. US
really mean poor performance, but actually means ‘any
reason at all.’” Fort, 638 F.3d at 1342.
Other circuits, even before the Cap Gemini contro-
versy, 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 certifi-
cates of stock (167 shares each) in United Artists Corpo-
ration (“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 tax-
able 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.
16See also Fort, 638 F.3d at 1339 (citing Chaplin
and Bonham); Fletcher, 562 F.3d at 844 (same).
HARTMAN v. US 20
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 over-
rule 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 domina-
tion and control over the assets in escrow, the courts and
the Service have generally held . . . that income is pres-
ently 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 tax-
payer'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 Chap-
lin and Bonham, it was the taxpayer’s conduct that de-
termined 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 fulfill-
ment of his contractual obligation, over which he exer-
cised 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 ex-partners’ 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 be-
cause [taxpayer] was required to forfeit the shares upon
the occurrence of certain conditions, because [taxpayer]
21 HARTMAN v. US
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 domin-
ion and control, we conclude that Mr. Hartman construc-
tively 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 contrac-
tual obligations.
The Claims Court’s decision granting summary judg-
ment to the government on the Hartmans’ claim for a
refund of federal income taxes paid in 2000 is affirmed.
AFFIRMED.