Duffy v. United States

NOTE: This disposition is nonprecedential.
United States Court of Appeals
for the Federal Circuit
______________________
JAMES P. DUFFY, BEATRIZ N. DUFFY,
Plaintiffs-Appellants
v.
UNITED STATES,
Defendant-Appellee
______________________
2015-5076
______________________
Appeal from the United States Court of Federal
Claims in No. 1:14-cv-00288-CFL, Judge Charles F.
Lettow.
______________________
Decided: January 8, 2016
______________________
JAMES P. DUFFY, BEATRIZ N. DUFFY, Walnut Creek,
CA, pro se.
ROBERT JOEL BRANMAN, I, Tax Division, United States
Department of Justice, Washington, DC, for appellee. Also
represented by JONATHAN S. COHEN, CAROLINE D.
CIRAOLO.
______________________
Before MOORE, O’MALLEY, and TARANTO, Circuit Judges.
2 DUFFY v. US
PER CURIAM.
In 2007, James Duffy withdrew his employment-
discrimination claims against his former employer, Unit-
ed Commercial Bank, in exchange for a settlement pay-
ment. He and his wife, Beatriz Duffy, initially treated the
settlement proceeds as ordinary income on their federal
tax return for the year, but they then filed amended
returns seeking to treat the proceeds as a capital gain,
which would be taxed at a lower rate than their ordinary
income. The Internal Revenue Service rejected such
capital-gain treatment. The Duffys challenged the IRS
determination by bringing this action in the United States
Court of Federal Claims, but that court, agreeing with the
IRS, granted summary judgment against the Duffys. We
affirm.
BACKGROUND
In 1999, Mr. Duffy started his own business providing
consulting on tax and accounting matters. United Com-
mercial Bank hired him in 2004 as a consultant and later
as its Tax Director and First Vice President. His respon-
sibilities included seeing that his department complied
with the accounting and financial-disclosure requirements
of the Sarbanes–Oxley Act, 15 U.S.C. § 7201 et seq.
In 2006, Mr. Duffy told the Bank’s management that
he saw instances of noncompliance with the Sarbanes–
Oxley Act. Soon afterwards, in November 2006, the Bank
placed Mr. Duffy on administrative leave and then termi-
nated his employment. On February 2, 2007, pursuant to
18 U.S.C. § 1514A(b), Mr. Duffy timely filed a claim
against the Bank with the Department of Labor. He
alleged that the Bank “terminated his employment be-
cause of his participation in [whistleblower] activity
protected by the Sarbanes–Oxley Act [under 18 U.S.C.
§ 1514A(a)], and that [the Bank] retaliated against him to
punish him for his refusal to participate in the [Bank’s]
unethical and illegal conduct.” J.A. 84.
DUFFY v. US 3
On October 11, 2007, Mr. Duffy and the Bank entered
into a Settlement Agreement and General Release. The
terms of the agreement obligated the Bank to pay $50,000
directly to Mr. Duffy and $25,000 to Mr. Duffy’s attorneys
on his behalf. In exchange, Mr. Duffy’s termination from
the Bank would become permanent, and he would imme-
diately withdraw all of his claims against the Bank pend-
ing before the Department of Labor. Mr. Duffy stipulated
that he would be solely responsible for his tax liabilities
relating to his receipt of the Bank’s payment and that the
Bank made no representations about the tax treatment of
that payment. The agreement explicitly noted that it was
entered into “for the exclusive purpose of avoiding the
expense and inconvenience of further litigation.” J.A.
139. The agreement was reviewed and approved by an
administrative law judge at the Department of Labor.
Mr. and Mrs. Duffy filed their federal income-tax
return for 2007, listing the $50,000 settlement payment
as “other taxable income,” and they received a refund of
$1,500. Coming to believe, however, that the settlement
payment should not have been listed as income, the
Duffys filed two amended tax returns seeking a refund of
$13,049. They declared that the settlement proceeds
should be treated either as compensation for physical
injury (and thus excludable from income under 26 U.S.C.
§ 104(a)(2)) or as capital-gain income for lost goodwill of
Mr. Duffy’s financial consulting business (and thus taxed
at a lower rate than their ordinary income, id. §§ 1011–
1012). The IRS disallowed the request for a refund,
stating that “[t]he $50,000 non-employee compensation
from United Commercial Bank is taxable as originally
filed.” J.A. 59.
The Duffys filed suit under 28 U.S.C. § 1346(a)(1) in
the Court of Federal Claims, arguing that the IRS errone-
ously denied their refund claim. The government moved
to dismiss for failure to state a claim. The court converted
the government’s motion to dismiss to a motion for sum-
4 DUFFY v. US
mary judgment, and then granted the summary-judgment
motion. The court rejected the Duffys’ claim that the
settlement proceeds could be treated as non-taxable
compensation for physical injury, and the Duffys do not
appeal that conclusion. The court also determined that
the settlement proceeds should not be treated as capital-
gain income, reasoning that because there was no sale or
exchange of business goodwill (the only possible capital
asset identified by the Duffys), there could be no capital
gain under 26 U.S.C. § 1222. On that basis, the court
entered judgment for the government.
The Duffys appeal, challenging the conclusion that
the settlement proceeds are not a capital gain. We have
jurisdiction under 28 U.S.C. § 1295(a)(3). We review the
grant of summary judgment de novo. See Abrahamsen v.
United States, 228 F.3d 1360, 1362 (Fed. Cir. 2000).
DISCUSSION
The Internal Revenue Code defines “capital gain”
(whether short- or long-term) as “gain from the sale or
exchange of a capital asset.” 26 U.S.C. § 1222(1), (3).
Thus, to claim the preferential capital-gain tax rate for a
received payment, the taxpayer must show the existence
of a “capital asset” and that the payment was received in
a “sale or exchange” of that asset. Comm’r of Internal
Revenue v. Gillette Motor Transp., Inc., 364 U.S. 130, 133
(1960). Here, even if Mr. Duffy had goodwill in his con-
sulting business that qualifies as a “capital asset,” see
Schelble v. Comm’r of Internal Revenue, 130 F.3d 1388,
1394 (10th Cir. 1997), he has not demonstrated that the
settlement payment was received in a “sale or exchange”
of that goodwill.
The Supreme Court has interpreted “sale” and “ex-
change” to require the transfer of property, either for
money (or its equivalent) in the case of a “sale” or for
reciprocal property in the case of an “exchange.” Comm’r
of Internal Revenue v. Brown, 380 U.S. 563, 571 (1965)
DUFFY v. US 5
(“sale”); Helvering v. William Flaccus Oak Leather Co.,
313 U.S. 247, 249 (1941) (“exchange”); accord Nat’l-
Standard Co. v. Comm’r of Internal Revenue, 749 F.2d
369, 371 (6th Cir. 1984) (“[W]here one party to the trans-
action receives neither property nor money or its equiva-
lent, there is no ‘sale or exchange.’ ”). In this case, no
property was transferred to United Commercial Bank.
Instead, the Bank agreed to a settlement payment in
exchange for Mr. Duffy abandoning his employment-
discrimination claims. Mr. Duffy simply extinguished his
claims, and any goodwill in his business remained with
him.
Several courts have held that the sale of goodwill oc-
curs “only when the business or a part of it, to which the
goodwill attaches, is sold.” Elliott v. United States, 431
F.2d 1149, 1154 (10th Cir. 1970); see also Baker v. Comm’r
of Internal Revenue, 338 F.3d 789, 793 (7th Cir. 2003)
(“Goodwill cannot be transferred a part [sic] from the
business with which it is connected.”). There was no such
sale of Mr. Duffy’s business, in whole or in part.
The particulars of Mr. Duffy’s underlying claim and
the settlement agreement reinforce the conclusion that
there was no “sale or exchange” of goodwill. See Freda v.
Comm’r of Internal Revenue, 656 F.3d 570, 577 (7th Cir.
2011) (examining the terms of the settlement agreement);
Alexander v. IRS, 72 F.3d 938, 942 (1st Cir. 1995) (looking
to the “nature and basis of the action settled”). Mr.
Duffy’s complaint filed with the Department of Labor
makes no reference to the goodwill of his consulting
business, but instead focuses on his termination as an
employee for making disclosures protected by the Sar-
banes–Oxley Act. And the settlement agreement nowhere
mentions that any part of the proceeds from the Bank
constituted compensation for harm to the goodwill of his
private business. In fact, the agreement evinces that its
exclusive purpose was to “avoid[] the expense and incon-
venience of further litigation” on Mr. Duffy’s claim under
6 DUFFY v. US
the Sarbanes–Oxley Act, notwithstanding Mr. Duffy’s
allegations of fraud, which we do not here consider.
Therefore, the Court of Federal Claims correctly granted
summary judgment for the government.
CONCLUSION
For the foregoing reasons, we affirm the judgment of
the Court of Federal Claims.
AFFIRMED