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Nature of Suit Code: 212
Nature of Suit: 
Cause of Action: 

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NOTE: This disposition is nonprecedential.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.

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2 DUFFY v. US

PER CURIAM. 

In 2007, James Duffy withdrew his employmentdiscrimination claims against his former employer, United Commercial Bank, in exchange for a settlement payment. 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 Commercial Bank hired him in 2004 as a consultant and later 

as its Tax Director and First Vice President. His responsibilities 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 terminated 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 because 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.

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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 immediately withdraw all of his claims against the Bank pending 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 erroneously 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 sumCase: 15-5076 Document: 22-2 Page: 3 Filed: 01/08/2016
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 capitalgain 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 consulting 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 “exchange” 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)

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DUFFY v. US 5

(“sale”); Helvering v. William Flaccus Oak Leather Co., 

313 U.S. 247, 249 (1941) (“exchange”); accord Nat’lStandard Co. v. Comm’r of Internal Revenue, 749 F.2d 

369, 371 (6th Cir. 1984) (“[W]here one party to the transaction receives neither property nor money or its equivalent, 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 employmentdiscrimination 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 occurs “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 Sarbanes–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 inconvenience of further litigation” on Mr. Duffy’s claim under 

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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

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