Robert Connell v. Commissioner of Internal Reven ( 2020 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 19-2668
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ROBERT A. CONNELL,
Appellant
v.
COMMISSIONER OF INTERNAL REVENUE
____________
On Appeal from the United States Tax Court
(Tax Court No. 16-14948)
Tax Court Judge: Honorable Julian I. Jacobs
____________
Submitted Pursuant to Third Circuit LAR 34.1(a)
June 16, 2020
Before: CHAGARES, PORTER and FISHER, Circuit Judges.
(Filed: August 6, 2020)
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OPINION*
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FISHER, Circuit Judge.
The Internal Revenue Service issued a notice of deficiency to Robert Connell for
his 2011 taxes. Connell contested the deficiency. The United States Tax Court ruled in
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7
does not constitute binding precedent.
favor of the IRS, concluding that the cancellation of over $3 million of debt Connell had
owed to his former employer, Merrill Lynch, was taxable as ordinary income and not as a
capital gain. Connell appeals. We will affirm.1
The District Court did not err in its articulation of the origin of the claim test.
Connell argues that the Tax Court should not have relied on State Fish Corp. v.
Commissioner,2 but instead on “more recent decisions,” such as Gail v. United States,3
that emphasize “economic reality.”4 However, State Fish and Gail express the origin of
the claim test in the same way: by asking, “In lieu of what were the damages awarded?”5
The Tax Court’s application of this test was not clearly erroneous. We are
“particularly deferential” to the Tax Court’s “weigh[ing] [of] all of the facts and
circumstances in ascertaining the true substance or nature of the claim.”6 Connell
contends that the Financial Industry Regulatory Authority arbitration panel awarded him
cancellation of the debt as compensation for his book of business, a capital asset, and
therefore the cancellation of debt income should have been taxed as a capital gain. He
1
The Tax Court had jurisdiction under 26 U.S.C. §§ 6213(a), 7442. We have
jurisdiction under 26 U.S.C. § 7482(a). “We review the Tax Court’s legal conclusions de
novo and its factual findings for clear error.” Anderson v. Comm’r, 698 F.3d 160, 164 (3d
Cir. 2012).
2
48 T.C. 465 (1967).
3
58 F.3d 580 (10th Cir. 1995).
4
Appellant’s Br. 34-35.
5
State Fish, 48 T.C. 472 (citation omitted); Gail, 58 F.3d at 582 (citation
omitted).
6
Francisco v. United States, 267 F.3d 303, 322 (3d Cir. 2001) (internal quotation
marks and citation omitted).
2
argues that the Tax Court “look[ed] only to the legal theories and terms” in his arbitration
filings “rather than the factual economic realities of what actually happened here.”7 On
the contrary, the Tax Court reviewed in depth Connell’s recruitment to Merrill Lynch; the
employment agreement and promissory note at the heart of this litigation; the
circumstances surrounding Connell’s departure from Merrill Lynch; and the arbitration,
including the filings and the award.
With this thorough factual backdrop firmly in hand, the Tax Court determined that
Connell did not carry his burden to show that the arbitration award was compensation for
his book of business. This conclusion was not clearly erroneous. The Tax Court found
that the $3.6 million loan, the balance of which the arbitration panel extinguished, was
part of Connell’s compensation package. Connell’s “monthly transition compensation”
was $42,980, and his monthly loan payment was also $42,980. The Tax Court found that
“[t]his arrangement, common to the industry, allowed Mr. Connell to receive the full
amount of his transition compensation up[ ]front, while recognizing income only as each
monthly payment came due.”8 Neither Connell’s employment agreement nor the
promissory note state or imply that the compensation was the price paid for Connell’s
7
Reply Br. 7.
8
JA13. In addition, Connell’s monthly transition compensation was reported on
his Merrill Lynch Form W-2. This also tends to show that the transition compensation
was ordinary income, and therefore, so was the cancellation of the debt Connell owed on
the loan that mirrored the compensation.
3
book of business. Moreover, Connell did not introduce evidence that would have shown
that the value of his book was the same as the outstanding balance of the loan.
Nor did the Tax Court err in interpreting Connell’s filings before the arbitration
panel. The Tax Court stated that, aside from arguing that Merrill Lynch offered the loan
to obtain Connell’s book of business, Connell’s arbitration “filings [also] emphasized that
Merrill Lynch breached the terms of the employment contract.”9 According to the Tax
Court, this latter “argument, by itself, would relieve Mr. Connell of his obligation to pay
the outstanding balance of the promissory note.”10 Connell insists that (1) a breach by
Merrill Lynch would not have relieved him of his repayment obligation, and (2) he never
argued it would. To the first point, if Merrill Lynch had violated the employment
agreement by terminating Connell other than for cause, Connell effectively would have
been relieved of his obligation to repay the loan because he would have been entitled to
up-front payment of the remainder of his monthly transition compensation—the loan
balance and the up-front payment would have been the same amount and would have
canceled each other out. To the second point, whether or not Connell articulated this
argument in the arbitration, it is plain on the face of the employment agreement and
promissory note.
9
JA39.
10
JA39.
4
Finally, the Tax Court did not misallocate the burden of proof because it did not
require Connell to prove his theory to a certainty. Connell repeatedly asserted before the
Tax Court that, when he was litigating before the arbitration panel, his only argument
about repayment of the loan was that he had the right to be compensated for his book of
business. The Tax Court disagreed that this was his only argument, pointing to other
arguments he made and concluding that he did not show that the extinguishment of the
loan was “solely for the acquisition of [his] book of business.”11 That was not a
misstatement of the burden of proof, but rather a response to the arguments Connell
himself made.
For the foregoing reasons, we will affirm the Tax Court’s judgment.
11
JA39.
5