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Sutardja v. United States

United States Court of Federal Claims

February 27, 2013, Filed

No. 11-724T




This case arises from a determination by the Internal Revenue Service ("IRS") that Dr. Sehat Sutardja's exercise of stock options granted by his company, Marvell Technology Group Limited, was subject to an additional tax under 26 U.S.C. § 409A (Internal Revenue Code). Section 409A provides for a 20 percent surtax plus interest on amounts received under a nonqualified deferred compensation plan, if certain conditions exist. § 409A(a)(1)(A-B). Dr. Sutardja exercised his stock options in 2006 during a transition period between the effective date of section 409A, January 1, 2005, and the effective date of the applicable regulations, January 1, 2008. The amount in dispute is $5,282,125, plus interest.

Dr. Sutardja and his wife, Weili Dai, filed  [**2] their tax refund suit in this Court on November 1, 2011 for the 2006 tax year, and on August 21, 2012, they filed a motion for partial summary judgment. On October 10, 2012, Defendant cross-moved for partial summary judgment, and the parties thereafter filed their respective reply briefs. The parties also submitted joint stipulations that could serve as the factual basis for summary judgment motions. The Court has certain evidentiary documents before it, which the parties furnished as exhibits to the stipulations and the summary judgment briefs. The Court heard oral argument in Washington, D.C. on January 28, 2013.

Plaintiffs contend that they are entitled to a refund of all taxes paid under section 409A for four reasons: (1) the grant of an employee stock option is not a taxable event; (2) the Treasury regulations exclude stock options from treatment as deferred compensation; (3) Plaintiffs did not have a "legally binding right" to the shares until the exercise of the options; and (4) any deferral of compensation attributable to the options was exempted from section 409A taxation under the short-term deferral exception set forth in IRS Notice 2005-1, 2005-1 C.B. 274 ("Notice 2005-1").  [**3] Defendant argues that Plaintiffs' stock option was granted at a discount and therefore falls squarely within the purview of section 409A. In support of this contention, Defendant asserts that (1) section 409A permits taxation of discounted stock options and does not run afoul of Supreme Court precedent; (2) the Treasury regulations relied upon by Plaintiffs are inapplicable to section 409A; (3) Plaintiffs had a legally binding right to the option upon vesting; and (4) the option did not qualify for a short-term deferral exemption under Notice 2005-1.

The Court concludes that a genuine issue of material fact exists, namely, whether the stock option was discounted at the time it was granted. The Court finds, and the parties agree, that this is a necessary factual predicate to tax liability under section 409A, and therefore complete resolution of this case through summary judgment is not possible. However, the four legal arguments presented by the parties either do not depend on  [*361]  whether the option was discounted or the parties have conceded, for purposes of this motion, that it was indeed discounted. Therefore, these legal arguments are appropriate for partial summary judgment, and adjudication  [**4] of these issues does much to narrow the case for trial. Accordingly, for the reasons explained below, Plaintiffs' motion for partial summary judgment is DENIED, and Defendant's cross-motion for partial summary judgment is GRANTED.

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109 Fed. Cl. 358 *; 2013 U.S. Claims LEXIS 126 **; 2013-1 U.S. Tax Cas. (CCH) P50,214; 111 A.F.T.R.2d (RIA) 2013-997


Subsequent History: Later proceeding at Sutardja v. United States, 2014 U.S. Claims LEXIS 849 (Fed. Cl., Aug. 26, 2014)

Later proceeding at Sutardja v. United States, 2014 U.S. Claims LEXIS 850 (Fed. Cl., Aug. 26, 2014)


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Tax Law, Tax Accounting, Retirement Plans, Tax Sheltered Annuities, Civil Procedure, Summary Judgment, Entitlement as Matter of Law, General Overview, Burdens of Proof, Movant Persuasion & Proof, Nonmovant Persuasion & Proof, Judgments, Evidentiary Considerations, Motions for Summary Judgment, Cross Motions, Compensation & Welfare Benefits, Tips, Wages & Other Compensation, Compensation for Services, Federal Income Tax Computation, Stock Options, Administrative Law, Judicial Review, Standards of Review, Rule Interpretation, Securities Law, Blue Sky Laws, Types of Securities, Options, Subscription Rights & Warrants