Opinion ID: 3039769
Heading Depth: 2
Heading Rank: 3

Heading: blackout period and recalculation

Text: Tuff urges alternatively that he is entitled to have his case remanded in order for the district court to recalculate his tax liability incrementally as of the date each blackout period lapsed. Tuff believes that a unique set of factors allows him to take advantage of 26 C.F.R. § 1.83-1(e), which states that: If a person is taxable under section 83(a) when the property transferred becomes substantially vested and thereafter the person’s beneficial interest in such property is nevertheless forfeited pursuant to a lapse restriction, any loss incurred by such person (but not by a beneficiary of such person) upon such forfeiture shall be an ordinary loss to the extent the basis in such property has been increased as a result of the recognition of income by such person under section 83(a) with respect to such property. 26 C.F.R. § 1.83-1(e) (emphasis added). Tuff argues that two different types of events occurred while he owned the RealNetworks stock at issue which allow him to utilize the benefit of 26 C.F.R. § 1.83-1(e). First, he UNITED STATES v. TUFF 19033 argues that the mere lapse of a blackout period is a taxable event that “require[s]” him to recognize ordinary, as opposed to capital, loss because the risk of loss in the market value of his RealNetworks stock during blackout periods, coupled with the prohibition on sale during such periods, creates a substantial risk of forfeiture. Second, Tuff argues that sales of his RealNetworks stock by Morgan Stanley during blackout periods also “require[s]” him to recognize ordinary loss, because his property was forfeited pursuant to a lapse restriction. He cites no relevant authority for this proposition, and we have found none. [12] Defining a few key terms is necessary. First, 26 C.F.R. § 1.83-3(i) defines a lapse restriction as “a restriction other than a nonlapse restriction as defined in paragraph (h) of this section, and includes (but is not limited to) a restriction that carries a substantial risk of forfeiture.” In other words, it is a temporary restriction that carries a substantial risk of forfeiture. Second, “[a] substantial risk of forfeiture exists where rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is substantial if such condition is not satisfied.” 26 C.F.R. § 1.83-3(c)(1) (emphasis added). Importantly, however, “[t]he risk that the value of the property will decline during a certain period of time does not constitute a substantial risk of forfeiture.” Id.
Taxable Event Because a Blackout Period is not a Lapse Restriction [13] Tuff’s first argument can be disposed of quickly. Tuff alleges that the blackout periods are a lapse restriction because, if he were to violate the restriction and sell his stock during a blackout period, the possibility that his stock would be forfeited is substantial. In virtually every example provided 19034 UNITED STATES v. TUFF in the regulations, however, the occurrence of the condition creating a substantial risk of forfeiture is related, as the regulation requires, to the initial transfer of the property. Section 1.83-3(c)(2) clearly illustrates this important distinction which Tuff ignores: Where an employee receives property from an employer subject to a requirement that it be returned if the total earnings of the employer do not increase, such property is subject to a substantial risk of forfeiture. On the other hand, requirements that the property be returned to the employer if the employee is discharged for cause or for committing a crime will not be considered to result in a substantial risk of forfeiture. The first example is a lapse restriction because the condition, increased earnings, is related to the likely purpose of the transfer, to motivate the employee to work hard. The second example is not a lapse restriction because it is difficult to conceive of a way in which the condition, termination for cause or commission of a crime, could be related to the purpose of any transfer. [14] The facts of this case are far more similar to the second example than the first. Here, the occurrence of the condition allegedly creating a substantial risk of forfeiture, the selling of stock during a blackout period, is not at all related to the purpose of the transfer. A blackout period is used to avoid the appearance of impropriety with respect to insider trading, and Tuff makes no effort to show how this condition could be related to the purpose of any stock transfer. A major portion of Tuff’s argument that the blackout periods create a substantial risk of forfeiture is that they caused him to suffer a loss in the market value of his RealNetworks stock while he was prohibited from selling them. As noted, however, the definition of substantial risk of forfeiture expressly excludes the UNITED STATES v. TUFF 19035 risk that the property will decline in value. See 26 C.F.R. § 1.83-3(c)(1). Tuff also attempts to demonstrate that the blackout periods create a substantial risk of forfeiture by way of a comparative analogy to I.R.C. § 83(c)(3).5 According to Tuff, because Congress has determined that a civil suit pursuant to § 16(b) of the Securities Exchange Act of 1934 amounts to a substantial risk of forfeiture, so too should civil suits resulting from sales of stock during blackout periods. This argument misses the point entirely. By enacting I.R.C. § 83(c)(3), Congress demonstrated that civil suits are not generically covered by I.R.C. § 83. Contrary to Tuff’s argument, this indicates that for a civil violation to be considered a substantial risk of forfeiture, Congress must act specifically to include it within the scope of I.R.C. § 83. See, e.g., United States v. Lopez-Perera, 438 F.3d 932, 936 (9th Cir. 2006) (explaining that when Congress demonstrates its understanding of the meaning of a statute through the enactment of new provisions, that congressionally-ratified meaning should be applied by the courts). Congress has not amended I.R.C. § 83 to include civil suits for blackout period violations in the definition of substantial risk of forfeiture, and we will not speculate on a hypothetical application.
Satisfy the Requirements of 26 C.F.R. § 1.83-1(e) [15] The second of Tuff’s arguments is disposed of even more quickly. According to Tuff, because Morgan Stanley sold his RealNetworks shares in a margin call during a blackout period, his RealNetworks shares were forfeited pursuant 5 I.R.C. § 83(c)(3) provides that where the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, the person’s rights in the property are both “subject to a substantial risk of forfeiture,” and “not transferable.” 19036 UNITED STATES v. TUFF to a lapse restriction. This argument rests on Tuff’s conception of the blackout period as a “lapse restriction.” If we were to assume arguendo that a blackout period could be considered a lapse restriction, Tuff’s argument fails because he did not forfeit his RealNetworks stock pursuant to a lapse restriction, but pursuant to the Agreement he freely entered into with Morgan Stanley. Tuff could have paid down the debt he owed Morgan Stanley in order to satisfy the margin requirements. Had he done so, Tuff would have been able to keep all his RealNetworks shares, the blackout period notwithstanding. In fact, the purpose of the blackout periods was to ensure that Tuff retained his RealNetworks stock for the duration of the blackout period, not to serve as a means to forfeit the shares. Tuff in effect asks this court to hold that a blackout period has the exact opposite effect of its intended purpose. We decline to do so.