[00:00:00] Speaker 01:
Good morning.

[00:00:06] Speaker 01:
We have four cases on the calendar this morning.

[00:00:10] Speaker 01:
A tax case from the Court of Federal Claims, two patent cases, one of them from the PTO and the Veterans case.

[00:00:19] Speaker 01:
The Veterans case and the PTO case will be submitted on the briefs and not be argued.

[00:00:27] Speaker 01:
Our first case is Louis Velestra.

[00:00:30] Speaker 01:
At L versus the United States, 14-5127.

[00:00:36] Speaker 01:
Mr. Lonerhand.

[00:00:38] Speaker 01:
Ms.

[00:00:39] Speaker 04:
Lonerhand.

[00:00:44] Speaker 04:
Thank you, Your Honor.

[00:00:46] Speaker 04:
May it please the Court.

[00:00:49] Speaker 04:
In an act of infatuation here, Congress departed from the general rule that blanket tax is imposed on wages at the time that they are actually received by the tax mayor.

[00:00:58] Speaker 04:
The effect of Section 3121 v.

[00:01:01] Speaker 04:
2 in the case of this is that the taxpayer is taxed on a single amount as of his retirement date, reflecting future benefits that are expected to be received under the terms of a non-qualified deferred compensation plan.

[00:01:15] Speaker 04:
Question here is whether the regulation which mandates that this amount on which the taxpayer is going to be taxed must be computed with respect to, without regard to the near certainty,

[00:01:25] Speaker 04:
In this case, the taxpayer will not receive the benefits.

[00:01:28] Speaker 01:
In other words, you're saying that present value has to take into account the likelihood of a non-payment.

[00:01:36] Speaker 01:
That's right.

[00:01:37] Speaker 01:
But that's not what the regulation says.

[00:01:39] Speaker 01:
That may make good economic sense, but that's not what the regulation says.

[00:01:44] Speaker 04:
That's absolutely not what the regulation says.

[00:01:46] Speaker 04:
The regulation directs that the taxpayer disregard present value, or disregard the amount will ever be received in computing present value.

[00:01:57] Speaker 04:
And what we're saying is that the generally accepted definition of the term value, as used in the Internal Revenue Code, means an economically feasible and realistic value.

[00:02:07] Speaker 00:
Well, that's not the term that's usually used.

[00:02:10] Speaker 00:
The usual term is fair market value.

[00:02:13] Speaker 00:
Cartwright in these other cases are interpreting provisions that use fair market value.

[00:02:18] Speaker 00:
That language is not used in this provision, right?

[00:02:21] Speaker 04:
That's absolutely true.

[00:02:22] Speaker 04:
The Huntington case in the tax board is interpreting the plain term and statute value.

[00:02:27] Speaker 04:
So there are cases that interpret just the plain word value, and Huntington is an example of that.

[00:02:33] Speaker 04:
Where if the value has computed under a regulation, they use it as a standardized method of computing value, it's so economically unreasonable

[00:02:42] Speaker 04:
as to essentially violate the meaning of the word values and that the regulation is not applied.

[00:02:50] Speaker 00:
Well, are there any court of appeals cases that interpret statutes which use the term value rather than fair market value as requiring fair market value?

[00:03:00] Speaker 04:
It's true that the cases on which you realize McDonald's and Gresham, which are court of appeals cases, use the term fair market value.

[00:03:08] Speaker 04:
Value is understood.

[00:03:10] Speaker 00:
So is that the answer?

[00:03:11] Speaker 00:
There aren't any Court of Appeals cases to do that?

[00:03:13] Speaker 04:
There are tax court cases.

[00:03:15] Speaker 00:
But not Court of Appeals?

[00:03:16] Speaker 04:
Not Court of Appeals cases.

[00:03:18] Speaker 03:
I'm puzzled about the amount of money that's involved in this case.

[00:03:22] Speaker 03:
Not that that's determinative, but it's unusual.

[00:03:25] Speaker 03:
$3,800 and something dollars.

[00:03:29] Speaker 04:
That's right.

[00:03:30] Speaker 04:
And that's the product of the rate.

[00:03:33] Speaker 03:
In other words, I understand the mathematics, but I don't understand the litigation.

[00:03:40] Speaker 03:
Is there something more involved in this?

[00:03:42] Speaker 03:
$3,000.

[00:03:43] Speaker 04:
Well, Your Honor, there's approximately 150 people in the Court of Federal Claims who have similar cases in similar or perhaps greater amounts.

[00:03:54] Speaker 04:
There's an erroneous refund case that's now pending in District Court in Florida where the erroneous refund is maybe in the $20,000 range.

[00:04:02] Speaker 03:
So you see this as a

[00:04:04] Speaker 03:
lead cases sometimes?

[00:04:05] Speaker 04:
Yeah, the Court of Federal Claims stayed the other cases with the other pilots until this case could be finally resolved.

[00:04:13] Speaker 04:
So in the aggregate, it is probably a fair amount of money.

[00:04:20] Speaker 00:
Well, with the individual cases, would the amount of around $4,000 be typical of the amount that's claimed?

[00:04:29] Speaker 04:
I can't really say, Your Honor, certainly the guy in Florida has some $26,000 at issue.

[00:04:35] Speaker 04:
So, you know, certainly I would doubt that anybody has a million dollars at issue.

[00:04:42] Speaker 00:
I would think not.

[00:04:43] Speaker 04:
Right.

[00:04:44] Speaker 04:
Or even $100,000, because we're talking about a 1.45% rate, and most of these people did receive something, right?

[00:04:51] Speaker 04:
That's the reason that they got packed in the first place is because they were paid something

[00:04:58] Speaker 04:
by United, people who retired after United stopped paying, which was actually before the final decision which terminated the plan, those people presumably did not pay any FICA tax on the value of these benefits, even though at the time they retired, they were theoretically legally entitled to.

[00:05:17] Speaker 03:
I thought the judge of the Court of Federal Claims had written

[00:05:27] Speaker 03:
quite persuasive opinion, carefully worked through, carefully thought, cited all the relevant cases and regulations.

[00:05:38] Speaker 03:
Can you point to specifically something that judge did wrong?

[00:05:43] Speaker 03:
Because we correct errors, we don't retry cases.

[00:05:47] Speaker 03:
So what exactly in the judge's opinion went wrong?

[00:05:53] Speaker 04:
The judge's opinion doesn't discuss the Supreme Court's decision in Cartwright, which interprets the term fair market value, and it doesn't discuss any of the Court of Appeals decisions also interpreting the term fair market value, or the Tax Court decisions interpreting the term value, and refusing to apply regulations adopting a standardized method of value where

[00:06:18] Speaker 04:
the value produced by the regulations is so economically unusualized to be something other than the value.

[00:06:31] Speaker 04:
The judge also here relies pretty solely on the administrability, in other words, that the justification for the regulation here is that it is administrable.

[00:06:42] Speaker 04:
Of course, that would cover, for example, if the Treasury were to adopt a regulation

[00:06:48] Speaker 04:
setting forth a flat amount per person.

[00:06:50] Speaker 04:
That would be very administrative.

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In other words, if you're covered by an unqualified deferred compensation plan, you'll be taxed on $1 million per person at the time of your retirement.

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And that would be a very administrative regulation.

[00:07:03] Speaker 04:
Certainly, there's nothing in the words amount deferred that would suggest that that's prohibited.

[00:07:14] Speaker 04:
the Treasury did not make any other justification as to why the amount deferred should be calculated without regard to whether the taxpayer would ever receive the money.

[00:07:22] Speaker 00:
Did you agree that it could be pretty complicated to determine fair market value of these deferred compensation plans?

[00:07:32] Speaker 04:
There's a standardized method for determining the value of any present value of, for example, an annuity or

[00:07:40] Speaker 04:
any other stream of payments made over time.

[00:07:43] Speaker 04:
This stream of payments was intended to be made over someone's life.

[00:07:48] Speaker 04:
So there are mortality tables.

[00:07:50] Speaker 00:
That's not complicated, right?

[00:07:52] Speaker 00:
That's taken into account in the regulation.

[00:07:55] Speaker 00:
What's not taken into account is the credit worthiness.

[00:07:58] Speaker 00:
There's no standard method for determining the credit worthiness of the employer, right?

[00:08:03] Speaker 04:
What do regulations do?

[00:08:05] Speaker 00:
The answer, yes or no.

[00:08:09] Speaker 04:
Well, there is actually, right?

[00:08:10] Speaker 04:
There are credit ratings that employers have, right?

[00:08:15] Speaker 04:
There's certainly standardized methods for determining whether somebody is likely or not likely to pay back one of their unsecured debts.

[00:08:22] Speaker 00:
But that can be a pretty complicated exercise, right?

[00:08:28] Speaker 04:
Would it be complicated?

[00:08:29] Speaker 04:
Well, certainly in the cases where

[00:08:33] Speaker 04:
you can, the taxpayer can show, and I'm not suggesting that the rule should be, every employer has to determine their own creditworthiness, and that's the only reasonable interpretation that the Treasury could have adopted.

[00:08:45] Speaker 01:
Well, everyday bonds trade are an exchange based in part on, maybe small part, but in part on likelihood of repayment.

[00:08:57] Speaker 01:
So it is calculable.

[00:09:00] Speaker 00:
Well, yes, it absolutely is capable.

[00:09:02] Speaker 00:
But there's no market, whether it's for bonds, that will allow you to determine the value of the deferred compensation funds?

[00:09:08] Speaker 04:
Well, bonds, for example, are typically, well, maybe unsecured or secured, right?

[00:09:15] Speaker 04:
United here... But the answer is there's no market.

[00:09:17] Speaker 04:
There's no market for deferred compensation funds.

[00:09:20] Speaker 04:
Typically, they're not transferable, right?

[00:09:22] Speaker 04:
So you can't sell them or buy them.

[00:09:24] Speaker 04:
However, there is, you know, how could United have barred unsecured?

[00:09:29] Speaker 04:
And the answer is they could not have barred unsecured at any rate at the time that they're blessed to retire.

[00:09:33] Speaker 03:
Well, the risk that they don't want to take into account is the risk of bankruptcy, isn't it?

[00:09:42] Speaker 03:
That's correct.

[00:09:43] Speaker 04:
They don't want to take into account, well, in this case, United was bankrupt at the time.

[00:09:46] Speaker 04:
It's not that United might go bankrupt in the future.

[00:09:50] Speaker 04:
What we're saying is United was bankrupt.

[00:09:52] Speaker 03:
Well, we're going to take that up at the other side, but at least I am.

[00:09:58] Speaker 03:
But the issue in this regulation, as I understand it, is should we have a regulation, is it unreasonable to exclude from the regulation the risk of bankruptcy of a company that is going to at some time in the future pay a deferred retirement, right?

[00:10:18] Speaker 03:
Isn't that

[00:10:18] Speaker 04:
Is it unreasonable to take into account that the company is bankrupt and seeking to terminate the plan?

[00:10:24] Speaker 00:
As I read your briefs, you're not saying that the credit worthiness has to be taken into account in every instance, only when the company is actually bankrupt.

[00:10:33] Speaker 00:
Is that correct?

[00:10:34] Speaker 04:
Right.

[00:10:34] Speaker 04:
The case law says, essentially, it's a safety valve.

[00:10:38] Speaker 04:
And the taxpayer can show that the value is unreasonable in its case, and significantly unreasonable as compared to the value that

[00:10:47] Speaker 00:
Am I correct that you're attempting to distinguish between companies that are in bankruptcy and those that might in the future become bankrupt?

[00:10:55] Speaker 00:
And you're saying that the regulation only needs to take account of actually bankrupt companies.

[00:11:03] Speaker 00:
Is that correct?

[00:11:04] Speaker 00:
That's correct.

[00:11:04] Speaker 04:
And that's what we have here.

[00:11:06] Speaker 00:
How do you possibly distinguish between companies that are actually bankrupt and companies that might become bankrupt?

[00:11:13] Speaker 00:
In other words, you're saying

[00:11:14] Speaker 00:
They have to take into account the credit worthiness in one situation, but not in others.

[00:11:19] Speaker 00:
Why is that reasonable?

[00:11:21] Speaker 04:
Under the bankruptcy code, of course, customers can avoid their contracts, and here there's a collective bargaining.

[00:11:26] Speaker 00:
But I do not answer my question.

[00:11:27] Speaker 00:
From the point of view of the tax law, you're asking us to distinguish between companies that are actually bankrupt and those that might become bankrupt.

[00:11:34] Speaker 00:
In the actual bankruptcy case, you say that you have to take into account creditworthiness, but you say that in the future bankruptcy possibility situation, you don't have to take into account creditworthiness.

[00:11:46] Speaker 00:
From a tax standpoint, how can you justify the distinction between those two situations?

[00:11:51] Speaker 00:
That's a bright line, Your Honor.

[00:11:52] Speaker 04:
Like one company is entitled to avoid a touchback when the other company is not.

[00:11:57] Speaker 00:
It doesn't matter.

[00:11:58] Speaker 00:
If the standard were fair market value, you'd have to take into account the risk of each one of those situations, not draw that bright line that you're talking about, right?

[00:12:07] Speaker 04:
Well, no.

[00:12:07] Speaker 04:
The Treasury can take into account administrability.

[00:12:10] Speaker 04:
And certainly, there are standard methods of determining things.

[00:12:13] Speaker 04:
And what the case law says is where those standard methods go wrong, we have to apply a different method.

[00:12:17] Speaker 00:
Well, it sounds to me as though you're asking us to do the job that the Treasury has of rewriting the regulation to allow credit worthages to be taken into account for bankrupt companies, but not those that might in the future become bankrupt.

[00:12:32] Speaker 00:
And it's hard for me to see that that's our job.

[00:12:35] Speaker 04:
Well, I don't think the courts of McDonald and Gresham thought that they were rewriting the regulation.

[00:12:40] Speaker 04:
What they were saying is the understanding of the term, in that case, fair market value, prohibits a regulation which doesn't consider important components of fair market value.

[00:12:50] Speaker 00:
Yeah, but they weren't distinguishing between bankruptcy and present bankruptcy and future bankruptcy.

[00:12:54] Speaker 04:
No, they were talking about restrictions on transfer, which is a totally slippery subject.

[00:12:59] Speaker 04:
How much does that create a discount in the value of stock?

[00:13:03] Speaker 04:
That's something that has to be individually determined.

[00:13:09] Speaker 01:
We will save your rebuttal time.

[00:13:11] Speaker 01:
Thank you.

[00:13:14] Speaker 01:
Mr. Cohen.

[00:13:20] Speaker 03:
Mr. Cohen, let's pick up where Ms.

[00:13:24] Speaker 03:
Monahan left us, which is

[00:13:30] Speaker 03:
The regulation specifies certain kinds of things to take into account but doesn't include this bankruptcy problem.

[00:13:39] Speaker 03:
Is that correct?

[00:13:40] Speaker 01:
That's correct.

[00:13:41] Speaker 03:
Well, death is certain and you can calculate risk there based on large populations without any problem.

[00:13:53] Speaker 03:
Life insurance companies, everybody does that without any difficulty.

[00:13:57] Speaker 03:
I can see the problem with trying to calculate the risk of bankruptcy causing someone not to be able to get their deferred compensation when they haven't gone bankrupt yet.

[00:14:14] Speaker 03:
But once a company goes bankrupt and we know exactly what the facts are, why isn't that easily calculated?

[00:14:26] Speaker 02:
I can answer that.

[00:14:27] Speaker 02:
in two ways.

[00:14:30] Speaker 02:
It takes three pages in our brief from pages four through seven to chart the history of United's bankruptcy from 2002 until they finally wound the plan up in 2006 or 2007.

[00:14:47] Speaker 02:
So filing the petition and being in bankruptcy was not a determinative event so far as actually paying off these benefits.

[00:14:58] Speaker 02:
from the non-qualified plan.

[00:15:02] Speaker 03:
Let me put it to you... But it was, by the time, by the... When was it finally known?

[00:15:07] Speaker 03:
2002 to when?

[00:15:10] Speaker 02:
2007, I think, is the final... After the 7th Circuit.

[00:15:16] Speaker 02:
Decided in 2006.

[00:15:17] Speaker 03:
There was no later than 2007, right?

[00:15:23] Speaker 02:
Certainly no later than that.

[00:15:25] Speaker 02:
Probably 2006.

[00:15:27] Speaker 03:
And this litigation didn't occur until... He filed a refund claim in May of 2007.

[00:15:32] Speaker 03:
How about if he'd filed it in 2010?

[00:15:38] Speaker 03:
Would that have made a difference?

[00:15:40] Speaker 02:
No.

[00:15:42] Speaker 02:
But by that time, of course, there wouldn't be any benefits at all.

[00:15:47] Speaker 02:
It was agreed that there would never be any further... The last payment that he got, I believe,

[00:15:55] Speaker 02:
2007 and it was some $74, some stock.

[00:16:00] Speaker 00:
His retirement was in 2004, which was when actually the termination had to be made.

[00:16:08] Speaker 00:
In 2004, the status of the bankruptcy and the payouts that were going to be made was far from clear.

[00:16:13] Speaker 02:
Exactly.

[00:16:14] Speaker 02:
They had asked for a loan from the stabilization, the safety board, the PBGC was raising a rumpus.

[00:16:22] Speaker 02:
They were in the middle of protracted litigation involving the unions and how they were going to pay their qualified plan people and that was going to influence what happened with the non-qualified plan.

[00:16:38] Speaker 02:
Let me make one point on the contingencies.

[00:16:43] Speaker 02:
If a fellow retires and

[00:16:48] Speaker 02:
he's, let's say, 60 years old and in good health and under the regulations, it's posited that in his non-qualified, non-account balance plan, the value as computed under the regulation, which looks only to his actuarial mortality and to interest rates, is that his plan payment is $1,000.

[00:17:16] Speaker 02:
on which he owes FICA tax, Social Security, and health insurance tax.

[00:17:24] Speaker 02:
In the next day, or let's make it next month, he collects one payment, or maybe he doesn't collect anything, he steps off the curb and he gets hit by a truck.

[00:17:35] Speaker 02:
Now, he has had to pay FICA tax on a chunk of money that he is never going to see.

[00:17:47] Speaker 02:
that puts him in the same boat, no, a very different boat, than the guy who gets a thousand dollar balance.

[00:17:57] Speaker 02:
But instead of dying as the mortality tables say he should do in ten years, he lives for twenty.

[00:18:05] Speaker 02:
He's gotten a free ride because he doesn't pay any FICA tax on the value of that extra ten years.

[00:18:14] Speaker 02:
This is indeed a rule of

[00:18:16] Speaker 02:
Administrability, it does not, as you point out, it does not turn unfair market value because, as Ms.

[00:18:26] Speaker 02:
Monahan said, there's no market for deferred comp benefits.

[00:18:32] Speaker 02:
You don't look to things like Cartwright and cases like that that talk about restrictions on the transfer of property or whether you have to use some value that is open to question.

[00:18:46] Speaker 02:
because there's no market for it.

[00:18:49] Speaker 02:
This is a tax that's imposed on money that has been earned, it hasn't been paid, it's been earned and it has to pay its share of social security and health insurance taxes.

[00:19:04] Speaker 01:
It isn't to the point that irrespective of economics there's a regulation and there's little basis for us to invalidate the regulation.

[00:19:14] Speaker 02:
I would submit, Your Honor, there's no basis for you to invalidate the regulation in terms of any Chevron criteria, in terms of any state farm issues.

[00:19:24] Speaker 02:
The regulation, it seems to Judge Walsky and it certainly seems to us to be a very reasonable regulation.

[00:19:33] Speaker 02:
This is not a dominion resources type of problem.

[00:19:39] Speaker 02:
You don't have to get your hands dirty with that one.

[00:19:44] Speaker 02:
I think if the court has no further questions, I'm through.

[00:19:50] Speaker 01:
Ms.

[00:19:50] Speaker 01:
Monahan has a little time for rebuttal.

[00:19:56] Speaker 03:
Ms.

[00:19:57] Speaker 03:
Monahan, Judge Lurie put his finger on our problem, even if it's not yours, which is that regulation, we have to find that regulation invalid in order to help you, don't we?

[00:20:09] Speaker 04:
That's correct, Your Honor, and unlike the government, we think that Dominion helped us in that the regulation is illogical in a way, so that the regulation wasn't Dominion, in that it takes the concept of value and says, forget whether you will actually ever be paid.

[00:20:26] Speaker 04:
You're valuing a future payment stream, and we tell you, in valuing that, forget whether you're going to actually get it or not.

[00:20:34] Speaker 04:
And not because you might be hit by a truck or because you might outlive the actuarial tables.

[00:20:39] Speaker 04:
We have to value things that are future payment streams or life contingent using mortality tables.

[00:20:44] Speaker 04:
That's how we do it.

[00:20:45] Speaker 04:
And there's winners and losers in individual taxpayers, but the large number says the government is whole.

[00:20:52] Speaker 04:
And taxpayers as a whole are going to die according to those mortality tables.

[00:20:56] Speaker 04:
So it's not about the mortality table, getting hit by a truck, living a long time.

[00:21:01] Speaker 04:
You have to value something, a future stream, based on mortality.

[00:21:07] Speaker 04:
But more importantly, you have to look to whether you are going to actually get that money.

[00:21:12] Speaker 04:
And that's what we say is the illogical assumption that the regulations are making, similar to the illogical assumption that the regulations made in Dominion, that if you took a boiler out of service, you have to accrue interest on the entire plan.

[00:21:28] Speaker 04:
There isn't a logical assumption like this in regulations.

[00:21:31] Speaker 04:
This is something that issuing agencies should have their claim, where it conflicts with a long-standing principle of tax, where it conflicts with the premise that social security tax was imposed on income.

[00:21:45] Speaker 04:
The agency should have to explain why it is disregarded, what would be normally considered to be a very important component of figuring out the value of a future payment stream.

[00:21:59] Speaker 01:
Thank you, Mr. Moynihan.

[00:22:01] Speaker 01:
Moynihan will take the case under his eyes.