Opinion ID: 7016747
Heading Depth: 1
Heading Rank: 2

Heading: the oakland settlement

Text: The eminent domain suit filed by Oakland in 1980 was ultimately decided in favor of the Raiders. After it was decided that Oakland could not lawfully seize the Raiders’ franchise, the Raiders sought damages arising from Oakland’s condemnation action by filing a Notice of Claim for Damages in that proceeding. The Raiders sought recovery under the California and United States Constitutions, the common law, and California Code of Civil Procedure § . 1268.620. Section 1268.620 allows the recovery of “all damages proximately caused by” a failed eminent domain action. Cal.Civ.Proc.Code § 1268.620(b). The Raiders claimed that Oakland had denied the Raiders “the free and untrammeled possession and use of the team.” The Raiders claimed that they suffered damages from Oakland’s failed condemnation action in the following ways: (1) they were compelled to maintain a summer training camp in Santa Rosa, California; (2) they were compelled to lease the Oakland Coliseum; (3) they were prevented from constructing the luxury suites in the LA Coliseum, and were thereby deprived of income from the sale and rental of those suites; (4) they suffered reduced attendance for home games played in the LA Coliseum; (5) they were deprived of income from radio contracts; and (6) they were forced to pay extra expenses for the relocation of personnel. Oakland objected to the Claim for Damages on procedural grounds. To avoid these procedural objections, the Raiders, at the suggestion of the Superior Court, filed a complaint of inverse condemnation against Oakland for damages arising out of the eminent domain action. The Raiders reiterated their Claim for Damages, and stated that they had suffered damages in excess of $26 million. The Superior Court consolidated the two actions. During discovery in the consolidated actions, the Raiders proffered a study detailing approximately $25 million in damages they claimed had been caused by Oakland’s eminent domain action. Over $18 million of the damages claimed were attributed to lost income from suite rentals. Three million dollars were attributed to lost income from a contract with the Los Angeles Olympic Committee for use of the luxury suites, which the Raiders were prevented from constructing. The Raiders also claimed damages resulting from relocation and per diem expenses, lost radio income, lost attendance income, and lost food and beverage income. In November 1988, the Raiders and Oakland settled the lawsuit. Oakland agreed to pay the Raiders $4 million in four yearly installments of $1 million plus interest. The settlement agreement stated that it was entered into for the “purpose of settling disputed claims involving the restoration of lost franchise value.” For each of the tax years 1988 and 1989, the Commissioner determined that settlement proceeds of $600,000 ($1 million less $400,000 attorney’s fees) received by the Raiders constituted taxable income. The Tax Court found that the Oakland settlement represented recovery of lost profits and, therefore, constituted taxable income. Milenbach, 106 T.C. at 201. The Raiders argue that no portion of the settlement represented recovery of lost profits. They assert that the settlement represented recovery of lost value to the franchise and therefore should be treated as non-taxable return of capital. The Raiders claim that they never sought to recover lost profits in their action against Oakland, only the lost value of their franchise. They argue that their Claim for Damages can only be read as seeking recovery for lost franchise value because they based their claim on Oakland’s denial of “the free use and enjoyment” of their franchise. The Raiders also point to the fact that the settlement agreement with Oakland provided that the payment compensated the Raiders for “lost franchise value.”
The nature of a settlement payment is a question of fact reviewed for clear error. See Langer v. Comm’r, 989 F.2d 294, 296 (8th Cir.1993) (per curiam); Wolfson v. Comm’r, 651 F.2d 1228, 1230 (6th Cir.1981); Spangler v. Comm’r, 323 F.2d 913, 916-17 (9th Cir.1963); Pac. Magnesium v. Westover, 183 F.2d 584, 584 (9th Cir.1950) (per curiam). When a claim is resolved by settlement, the relevant question for determining the tax treatment of a settlement award is: “In lieu of what were the damages awarded?” Getty v. Comm’r, 913 F.2d 1486, 1490 (9th Cir.1990); Raytheon Prod. Corp. v. Comm’r, 144 F.2d 110, 113 (1st Cir.1944). We take a “broad approach in determining the true nature and basis of a party’s claim.” Getty, 913 F.2d at 1491. If the payments are in lieu of lost profits, then they are taxable income. Shakertown Corp. v. Comm’r, 277 F.2d 625, 628 (6th Cir.1960); Raytheon, 144 F.2d at 113. If, however, the payments are for loss of franchise value due to damage to goodwill, then the payments are nontaxable return of capital. Raytheon, 144 F.2d at 113. The taxpayer bears the burden of establishing that proceeds of a settlement are what the taxpayer contends them to be. Getty, 913 F.2d at 1492. The Tax Court did not clearly err in finding that some portion of the Oakland settlement represented recovery for lost profits. The Raiders’ list of damages included several items that consisted entirely of lost profit. Nothing in the language of the Claim for Damages or the inverse condemnation complaint suggests that the Raiders intended to limit their recovery to the reduction in value of their franchise caused by loss of goodwill. In addition, almost every item listed in the damages report would have been taxable had it been received by the Raiders. Any settlement amount meant to replace this lost income would have been “in lieu” of taxable income and would itself be taxable. Getty, 913 F.2d at 1490. The Raiders argue that it is inherent in the nature of an inverse condemnation action that their potential recovery is limited to the damage done to the value of their franchise, and that the lost income was mentioned only as a measure of that damage. We need not decide whether an award in an inverse condemnation action represents recovery only for damage to the property, however, because the Raiders’ attempts to recover damages were not limited to an inverse condemnation action. The Raiders also sought recovery under California Code of Civil Procedure section 1268.620. Although the Raiders later filed an inverse condemnation action, the Claim for Damages under section 1268.620 was not dismissed prior to the settlement. Section 1268.620 allows the property owner in an unsuccessful eminent domain action to recover “all damages proximately caused by the proceeding and its dismissal as to that property.” CaLCiv. Proc.Code § 1268.620(b). In Community Development Commission v. Shuffler, 198 Cal.App.3d 450, 243 Cal.Rptr. 719, 725 (1988), the California Court of Appeal noted how “broadly worded” the provision was and stated that the statute allowed recovery of all damages caused by the eminent domain proceeding. The Shuffler court went on to note that this statute did not limit any claim the defendant might have under inverse condemnation for damage to property during litigation. Id. An action under section 1268.620 is separate and distinct from an inverse condemnation action. Any limits on the types of damages a plaintiff can recover in an inverse condemnation action do not apply to property owners seeking to recover damages under section 1268.620. The Raiders also contend that the language of the settlement agreement should be dispositive in determining the nature of the settlement payments. The settlement agreement stated that payments were meant to settle disputed claims “involving the restoration of lost franchise value.” The Raiders claim that the Tax Court should not have looked beyond the language of the settlement agreement in the absence of collusion or bad faith. Although the allocation set forth in a settlement agreement by the parties is one factor in determining the nature of a settlement payment, “[w]hen assessing the tax implications of a settlement agreement, courts should neither engage in speculation nor blind themselves to a settlement’s realities.” Bagley v. Comm’r, 121 F.3d 393, 395 (8th Cir.1997). A court should take a broad approach in determining the nature of a settlement payment and is not bound by any allocation made by the parties in their settlement agreement if there is evidence that the payment represented something else. See Bagley, 121 F.3d at 395; Delaney v. Comm’r, 99 F.3d 20, 23-24 (1st Cir.1996). This is especially true in a case, such as this one, where one party (Oakland) apparently had no interest in classifying damages one way or the other. Oakland had no motive to ensure that the allocation in the settlement agreement accurately represented the nature of the settlement payments. 2 Given the broad recovery allowed under section 1268.620 and the nature of the damages that the Raiders claimed to have suffered, the Tax Court did not clearly err in determining that some portion of the Oakland settlement represented taxable lost profits. Because the Raiders did not meet their burden of providing some basis for allocating the settlement between taxable lost profits and non-taxable damage to franchise, the Tax Court correctly upheld the Commissioner’s allocation of the entire amount to taxable lost profits.