Ju v. United States

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TONGZHONG JU and YANXIA LI, Plaintiffs, v. THE UNITED STATES, Defendant.

No. 22-1815 T

United States Court of Federal Claims

March 18, 2024

Neil H. Koslowe, Potomac Law Group, PLLC, Washington, DC, for plaintiff.

Elizabeth B. Villarreal, Tax Division, United States Department of Justice, Washington, DC, for defendant.

Granting in part and denying in part Dr. Ju's motion for summary judgment and granting in part and denying in part the government's cross-motion for summary judgment

OPINION AND ORDER

MOLLY R. SILFEN Judge

In 2015 and 2016, Tongzhong Ju and his wife, Yanxia Li (collectively for purposes of this opinion, "Dr. Ju") paid taxes on both proceeds from the sale of stock and a cash payment Dr. Ju received from the University of Oklahoma, where he previously worked. Dr. Ju now requests a partial refund of those taxes. He argues that (1) the stock that he sold should be eligible for treatment as qualified small business stock under 26 U.S.C. § 1202; (2) the cash payment was in exchange for a transfer of patent rights-as opposed to another type of payment from the university- and therefore qualifies for capital gain treatment under 26 U.S.C. § 1235(a); (3) he qualifies for additional deductions in 2016 and (4) he should recover attorney's fees and costs because of the Internal Revenue Service's (IRS's) unreasonable delays.

Dr. Ju moved for summary judgment on these issues before conducting discovery. The government cross-moved for partial summary judgment. On the first issue-the sale of the stock- a large portion of Dr. Ju's stock is not eligible for treatment as qualified small business stock because it was transferred to Dr. Ju within five years of when he sold it, but 18,017 shares might be eligible, depending on the earlier holdings and income of the business and depending on whether Dr. Ju can prove that he received the stock more than five years before the sale, two facts that neither party has proven. The court thus grants the government summary judgment on the majority of the shares and denies summary judgment to both parties on 18,017 shares. On the second issue-the cash payment-the court denies summary judgment to both parties because there is a genuine dispute over whether the cash payment at issue was a royalty in exchange for a transfer of patent rights licensed to Selexys or for another transaction related to another company called Tetherex. On the third issue-miscellaneous other deductions-the government does not contest most of Dr. Ju's additional 2016 deductions. Dr. Ju, in his reply, no longer argues for the remaining deductions for 2016. So the court grants Dr. Ju's motion for summary judgment as to $25,175 in deductions for 2016, and the court grant's the government's motion for summary judgment as to an additional $100 in requested deductions for 2016. Finally, on the fourth issue- attorney's fees-because the case is not over, the court will not yet address Dr. Ju's request for attorney's fees and costs. The court will deny that request without prejudice to Dr. Ju reraising it after final disposition of this case. Thus, this court grants in part and denies in part Dr. Ju's motion for summary judgment and grants in part and denies in part the government's cross motion for summary judgment.

I. Background

Dr. Ju, a former employee of the University of Oklahoma, is, as relevant to this case, a named inventor on two patents. ECF No. 9-4, 9-5. The university's policy is that all patents on inventions that were made or conceived by university employees are the property of the university and that employees must assign their rights in those patents to the university. ECF No. 9-3. Dr. Ju assigned his rights in both patents to the university before November 2003. ECF No. 9-4, 9-5, 9-6. In November 2003, the university licensed those two patents to Selexys Pharmaceuticals Corporation in return for cash and shares of Selexys stock. ECF No. 9-7 at 8.^[1]

The university licensing policy states that the university will give an inventor 35 percent of the gross revenues, including equity, that it receives under a patent license. ECF No. 9-3 at 4. While the university will give the inventor cash revenue when the university receives it, stock issued to the university "shall be held by the Controller's Office" until the employee leaves the university. Id. at 4-5.

In 2015, Dr. Ju had a dispute with the university about the revenue from his patents, and he and the university entered into a settlement agreement. ECF No. 9-11. The agreement stated that Selexys had previously issued 583,921 shares of common stock to the university, and 18,017 shares to Dr. Ju. Id. at 1. Selexys was directed to "reissue 53,441 shares of common stock (constituting 11.666667% (1/3 of the inventor's share) of the License Shares, less 18,017 shares already issued in the name of Dr. Ju) in the name of Dr. Ju, rather than the University." Id. at 2. In addition to Selexys stock, the agreement included terms regarding the stock of another entity named Tetherex.^[2] Id.

The settlement terms also included a payment of $33,500 from the university to Dr. Ju. ECF No. 9-11 at 1. Dr. Ju reported that payment as royalty income on his 2015 tax return. ECF No. 9-1 at 4 [¶18]. The next year, Dr. Ju sold his Selexys stock and reported the income on his tax return as a long-term capital gain. ECF No. 9-1 at 4 [¶¶19-20].

In 2019, Dr. Ju filed amended tax returns for 2015 and 2016. ECF No. 9-1 at 5 [¶22]. The amended 2015 tax return sought to treat the cash income from the university, which had been reported as royalties, as long-term capital gain income. ECF No. 4-1 at 2. The amended 2016 tax return sought to treat the proceeds from the sale of Selexys stock as "qualified small business stock," instead of long-term capital gains, which would entitle Dr. Ju to exclude part of those proceeds from his taxable income. ECF No. 4-2 at 2. The amended 2016 return also claimed additional itemized deductions. Id. at 1. The IRS disallowed both amended tax returns. ECF Nos. 9-18, 9-21.

Dr. Ju filed a complaint, and then an amended complaint, in this court, requesting a partial tax refund from his 2015 and 2016 taxes. ECF Nos. 1, 4.

II. Discussion

Dr. Ju moves for summary judgment, arguing that (1) the government owes him a refund for taxes he paid on the sale of qualified small business stock; (2) the government owes him a refund for taxes he paid on the $33,500 in cash from the university; (3) the government owes him a refund because he amended his 2016 tax return to include additional deductions; and (4) the court should award him attorney's fees and costs. See ECF No. 9. The government opposes and requests summary judgment in its favor on all issues, except that it agrees, on the third issue, that Dr. Ju is entitled to an additional $25,175 in itemized deductions for tax year 2016. ECF No. 12.

Summary judgment is appropriate when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." RCFC 56(a). Disputes over material facts preclude summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is material if it could "affect the outcome of the suit under the governing law." Id. A dispute is genuine when "the evidence is such that a reasonable [trier of fact] could return a verdict for the nonmoving party." Id.

When deciding a motion for summary judgment, a court must "determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249. Summary judgment should be granted when the record "could not lead a rational trier of fact to find for the nonmoving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 599 (1986) (quotation marks omitted). "When both parties move for summary judgment, grant of the motion in favor of one party must satisfy this rule concerning factual inferences; cross-motions do not change the requirement that all justifiable inferences must be drawn in favor of the losing party." Murphy Expl. & Prod. Co. v. Oryx Energy Co., 101 F.3d 670, 673 (Fed. Cir. 1996).

This court has jurisdiction over tax refund suits, namely, "[a]ny civil action against the United States for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws." 28 U.S.C. 1346(a)(1); see also United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1, 4 (2008).

In a refund suit, "the burden of proof is on the taxpayer to show that the Commissioner's determination is invalid." Helvering v. Taylor, 293 U.S. 507, 515 (1935). "A tax refund suit is a de novo proceeding, in which the plaintiff bears the burden of proof, including both the burden of going forward and the burden of persuasion." Sara Lee Corp. v. United States, 29 Fed.Cl. 330, 334 (1993) (citing Taylor, 293 U.S. at 515). "[T]he taxpayer must come forward with enough evidence to support a finding contrary to the Commissioner's determination." Danville Plywood Corp. v. United States, 899 F.2d 3, 7 (Fed. Cir. 1990).

A. Dr. Ju has not shown that he can exclude half the proceeds of the stock sales from his 2016 gross income under 26 U.S.C. § 1202; there is a genuine issue as to some of the income from the stock sales

Under 26 U.S.C. § 1202, taxpayers can exclude half the gain from the sale or exchange of qualified small business stock. This exclusion is allowed (1) if the taxpayer acquired the stock at original issue (26 U.S.C. § 1202(c)(1)(B)) and held it for more than five years (id. § 1202(a)(1)) and (2) if the small business meets the...