In re: Anthony Scott Levandowski

Background

The Internal Revenue Service and the California Franchise Tax Board appealed four bankruptcy-court orders connected with Anthony Scott Levandowski’s Chapter 11 proceedings. The appeals were consolidated for administrative purposes. Peter Kravitz, trustee of the Levandowski Residual Liquidation Trust, joined Levandowski as an appellee.

Google, Uber, and Levandowski entered a global settlement addressing their dispute over an indemnification agreement and providing a framework for confirming a Chapter 11 plan. Under the settlement, Uber agreed to make two payments: a sealed amount paid directly to Google, called the “Main Uber Payment,” and $2 million paid to the bankruptcy estate for additional plan expenses. The appeal primarily concerned the Main Uber Payment.

Levandowski asked the bankruptcy court to decide under 11 U.S.C. § 505 whether the Main Uber Payment created gross income for him or, alternatively, whether the plan could be confirmed without reserving for possible taxes. The IRS challenged the bankruptcy court’s authority to decide the issue but did not brief the tax merits. The Franchise Tax Board filed an opposition that addressed the merits but said it lacked enough information to respond fully.

The bankruptcy court held that it had authority to decide the tax issue and that the dispute was sufficiently immediate for constitutional purposes. On the merits, it concluded that the indemnification arrangement was like insurance and that the Main Uber Payment was not gross income for Levandowski or the estate. It did not address Levandowski’s other theories.

Tax authority and readiness of the dispute

The district court held that 11 U.S.C. § 505(a) gave the bankruptcy court statutory authority to determine the legality or amount of a tax, including a tax item that contributes to the final tax calculation. The court rejected the Tax Agencies’ argument that the bankruptcy court could decide only a complete annual tax liability after a tax return was filed.

The district court also held that the tax issue was not an improper advisory opinion. The payment arose from an executed settlement, and the tax question directly affected the feasibility of the proposed bankruptcy plan and the Tax Agencies’ claims. The court concluded that the dispute was sufficiently fit for decision and that delaying the determination would create hardship by potentially delaying confirmation and the bankruptcy fresh start.

Tax ruling

The district court held that the bankruptcy court erred as a matter of law by beginning with the premise that insurance payments are generally excluded from gross income. The Internal Revenue Code broadly defines gross income and contains specific exclusions for certain types of insurance payments; it does not exclude all insurance payments.

Because the bankruptcy court relied on that defective premise and did not adequately analyze the statutory definition of gross income or the alternative theories, the district court reversed and remanded the Tax Order. It did not vacate the Tax Order at that point, leaving the bankruptcy court to decide on remand whether vacatur was appropriate after considering possible alternative grounds.

Confirmation Order

Because the plan contained no reserve for tax liability and Levandowski had acknowledged that the plan would not otherwise be feasible if the Main Uber Payment created tax liability, the district court remanded the portion of the Confirmation Order that depended on the Tax Order. The bankruptcy court was directed to reconsider the tax consequences and determine whether the Confirmation Order required modification or was otherwise affected by legal error.

The district court separately addressed setoff rights. It held that the bankruptcy court had erred in its determination concerning those rights and directed it to reconsider the relevant authority on remand. In particular, the broad discharge injunction could conflict with creditors’ rights to offset mutual pre-bankruptcy debts under 11 U.S.C. § 553. The district court noted that the Tax Agencies’ presentation of the setoff issue was partly theoretical and did not identify a concrete setoff.

The district court rejected the IRS’s argument that the plan’s principal purpose was tax avoidance. It found no error in the bankruptcy court’s conclusion that tax avoidance was not the plan’s principal purpose, noting the absence of admissible evidence or supporting legal authority from the IRS and the settlement’s stated connection to resolving contentious litigation, paying existing claims, and providing Levandowski a fresh start.

Disposition

The court ordered that the bankruptcy court’s Tax Order was reversed and remanded for further consideration. To the extent the Confirmation Order depended on the Tax Order, that order was remanded for reconsideration and possible modification or vacation. The finding that the plan was not initially confirmed for tax-avoidance purposes was affirmed. The case was remanded to the bankruptcy court for further proceedings and entry of judgment consistent with the opinion.