            United States Court of Federal Claims
                                  No. 95-39 C
                                August 31, 2015
________________________________________

ANCHOR SAVINGS BANK, FSB,

                       Plaintiff,                                 Winstar; Tax Gross Up

v.

THE UNITED STATES OF AMERICA,

                       Defendant.
________________________________________

       Adrian Wager-Zito, Jones Day, Washington, DC, attorney of record for plaintiff.

        Scott D. Austin and John J. Todor, United States Department of Justice, Commercial
Litigation Branch, Civil Division, Washington, DC, for defendant.


                                    OPINION and ORDER

Block, Judge.

        This is before the court to determine the amount of tax gross up that plaintiff is entitled to
and to finalize the total amount to be awarded to plaintiff in this litigation.
        The following is a brief summary of the pertinent facts. For a more detailed account, see
Anchor Sav. Bank, FSB v. United States, 121 Fed. Cl. 296 (2015) (“Anchor V”). In 1995,
plaintiff, Anchor Savings Bank, FSB (“Anchor”),1 filed suit in this court, claiming that the
United States had breached the terms of several agreements with Anchor. Specifically, plaintiff
argued that the passage of the Financial Institutions Reform, Recovery and Enforcement Act
(“FIRREA”), Pub. L. 101-73, 103 Stat. 183 (1989), breached these contracts by rescinding the
favorable accounting treatment that the United States had afforded Anchor in exchange for
Anchor’s agreement to buy several failing savings and loan associations. Plaintiff argued that as
a result of this breach, Anchor was severely undercapitalized and was compelled to sell valuable
assets at a loss to prevent regulatory closure.



1
 As explained in greater detail below, Anchor has undergone several changes of ownership since
this suit was filed in January 1995. To avoid confusion, this opinion will continue to refer to
plaintiff as “Anchor.”
        In 2008, this court found the United States liable for breach of contract and awarded
plaintiff, Anchor $356,454,910.91 in damages, including net lost profits, damages from reduced
stock proceeds, mitigation costs, damages from branch sales, and “wounded bank” damages.
Anchor Sav. Bank, FSB v. United States, 81 Fed. Cl. 1 (2008) (“Anchor III”). The court also
found that plaintiff was entitled to a tax “gross up” for its damages from reduced stock proceeds
and mitigation costs. Id. at 134-35. Nonetheless, the court postponed calculating the gross up
because it was uncertain at the time whether Washington Mutual would earn taxable income that
year, due to its declining financial condition. Opinion and Order (June 27, 2008), ECF No. 296,
at 3. Defendant appealed this judgment and plaintiff filed a cross-appeal, arguing that the court
had erred in calculating the mitigation costs.
        On May 10, 2010, the United States Court of Appeals for the Federal Circuit (“Federal
Circuit”) denied defendant’s appeal and affirmed, in part, this court’s judgment. Anchor Sav.
Bank v. United States, 597 F.3d 1356 (Fed. Cir. 2010) (“Anchor IV”). The Federal Circuit,
unsure of the basis for this court’s calculation of mitigation costs, remanded the case for
clarification of this issue. Id. at 1373-74.
        The resolution of this issue was delayed on account of complications arising out of
changes of ownership undergone by plaintiff. In January 1995, Anchor merged into the Dime
Savings Bank of New York. In 2002, Dime merged with Washington Mutual Bank (“WMB”)
and its holding company, Washington Mutual, Inc., in a “merger of equals.” Anchor V, 121 Fed.
Cl. at 308. Following this merger, ownership of the Anchor litigation passed on to WMB. Id.
On September 28, 2008, the Office of Thrift Supervision seized WMB and placed it into a
receivership with the Federal Deposit Insurance Corporation (“FDIC”). That same day, the
FDIC, acting in its capacity as receiver, sold substantially all of WMB’s assets, including this
Anchor litigation, to JPMorgan Chase Bank, N.A. (“JPMC”) for $1.8 billion, pursuant to the
terms of a purchase and assumption agreement. Id. The government disputed whether this
agreement actually encompassed the Anchor litigation, and on August 2, 2010, filed a motion to
dismiss for lack of standing.
        On May 18, 2015, the court rejected defendant’s motion to dismiss. Id. The court also
granted plaintiff’s motion for correction of its calculation of mitigation damages and found that
plaintiff is entitled to a pre-gross up judgment of $419,645,910.91. Id. at 332. The court further
held that of this amount, $228,091,000.00 is subject to a tax gross up. Id. The court directed the
parties to confer regarding the appropriate calculation for the final gross up rate and to apprise
the court of their progress by June 19, 2015. Id.
        The Federal Circuit allows plaintiffs to seek a “tax gross up” to ensure that damages
awarded effectively compensate plaintiffs for the harm caused by defendant’s action. Damages
awarded by this court are taxable. Therefore, to make plaintiff whole, it is appropriate for the
court to “adjust[] the damages awarded to reflect tax consequences.” Home Sav. of America,
FSB v. United States, 399 F.3d 1341, 1356 (Fed. Cir. 2005). To the extent that the government’s
action deprived plaintiff of “monies that would not have been taxable,” plaintiff is entitled to an
additional award to “zero out” the ultimate tax liability. Id. See also AmBase Corp. v. United
States, 100 Fed. Cl. 548, 578 (2011) (“Plaintiffs are entitled to a tax gross-up in an amount to be
determined if and when any taxes should be imposed on the damages award, although ‘if logic
and pure common sense governed, it would make far greater sense for the Government to simply
not tax Plaintiffs.’”) (citations omitted).


                                               -2-
         A tax gross up is calculated by projecting plaintiff’s liability for the portion of the award
that is subject to gross up. Anchor III, 81 Fed. Cl. at 134-35. Although plaintiffs are required to
show that they are entitled to damages with “reasonable certainty,” once they have established
this entitlement, the court “may ‘make a fair and reasonable approximation of the damages.’”
Fifth Third Bank v. United States, 518 F.3d 1368, 1378 (Fed. Cir. 2008) (quoting Bluebonnet
Sav. Bank, F.S.B. v. United States, 266 F.3d 1348, 1356-57 (Fed. Cir. 2001)). “It is not essential
that the amount [of damages] be ascertainable with absolute exactness or mathematical
precision.” Bluebonnet Sav. Bank, 266 F.3d at 1355. “[W]hen damages are hard to estimate, the
burden of imprecision does not fall on the innocent party.” LaSalle Talman Bank, F.S.B. v.
United States, 317 F.3d 1363, 1374 (Fed. Cir. 2003).
        As for the timing of the gross up award, this court has previously observed that “[t]he
court will typically award the tax gross up along with compensatory damages if it is reasonably
certain about the rate at which plaintiffs will pay income tax on the compensatory damages.” See
Anchor, Opinion and Order, ECF No. 296, at 2. But if the court is uncertain whether plaintiff’s
award or a portion of the award will be taxed, the court can deny the gross up and invite plaintiff
to reopen the judgment pursuant to RCFC 60(b) in the event that the Internal Revenue Service
(“IRS”) does in fact tax some or all of the award. See, e.g., Bank of America, FSB v. United
States, 67 Fed. Cl. 577, 596-97 (2005).
        The court now turns to the matter before it—the calculation of plaintiff’s gross up award.
As explained above, the court recently held that plaintiff is entitled to a pre-gross up judgment of
$419,645,910.91, of which $228,091,000.00 is subject to a tax gross up, and directed the parties
to submit a report regarding the gross up calculation. Anchor V, 121 Fed. Cl. at 332. On June
19, 2015, Anchor submitted a status report in response to the court’s order. At the outset,
plaintiff acknowledges that it is not entitled to gross up the entire $228,091,000.00 that is subject
to gross up. Pl.’s Status Report, ECF No. 374, at 1-2. Rather, plaintiff states that it is only
entitled to gross up the portion of the $228,091,000.000 that it expects to declare as a taxable
gain. Id. Defendant concurs with this assessment. Def.’s Status Report, ECF No. 375, at 2-3.
        Under U.S. federal tax law, the taxable gain for an asset is the difference between the
present value of the asset and the cost or price at which the asset was acquired (adjusted for
depreciation and other factors) by the party in possession. This “cost” is frequently referred to as
“basis,” or as “tax basis.” 2 The present value of the Anchor litigation was resolved on May 18,
2015, when this court found that Anchor is entitled to a pre-gross up award of $419,645,910.91.3


2
 Under U.S. federal tax law, income derived from the appreciation of assets is taxable. See, e.g.,
26 U.S.C. §§ 1(h), 1222. Taxes on such appreciations, or “capital gains,” are generally assessed
when a “taxable event” occurs--i.e., when some sort of transaction, like the sale or disposition of
the asset, occurs. 26 U.S.C. § 1001(b). To determine the taxable gain on an asset that has
appreciated in value, the Internal Revenue Service deducts the cost of acquiring the asset from
the present value of the asset. This cost is frequently referred to as “basis,” or “tax basis,” and
can be adjusted to take into account depreciation or losses incurred on other assets. See
generally 26 U.S.C. § 1001. For an overview of the rules governing this calculation, see Basis of
Assets, I.R.S. Publication 551 (Rev. December 2014), at http://www.irs.gov/pub/irs-
pdf/p551.pdf.
3
  As explained above, a tax gross up is an additional sum awarded to “zero out” any additional
tax liability for the underlying judgment. Accordingly, the underlying value of the litigation, for
                                              -3-
To calculate Anchor’s taxable gain on the $228,091,000.00, the parties agree that it is necessary
to determine the price that JPMC paid to acquire the Anchor litigation as well as the marginal
rates at which JPMC’s award will be taxed. Pl.’s Status Report at1-2; Def.’s Status Report, ECF
No. 375, at 2-3.
         As for the basis of the litigation, it must be noted that JPMC did not acquire the Anchor
litigation piecemeal, at a specific price; rather, it acquired Anchor’s assets (including the Anchor
litigation) as part of a package that was sold by the FDIC Receiver, under the terms of the
purchase and assumption agreement. See Anchor V, 121 Fed. Cl. at 314-18. Nonetheless,
plaintiff argues that the cost of the Anchor litigation can be readily determined by referring to the
Litigation Tracking Warrants (“LTWs”) 4 for the Anchor litigation, which were publicly trading
on the day of acquisition. According to plaintiff, an examination of the LTWs establishes that
the fair market value, or tax basis, of the Anchor litigation was $55,385,946.36.
        As explained above, taxable gain is calculated by deducting the basis from the present
value of an asset, which for purposes of this calculation, is $419,645,910.91. Nonetheless,
plaintiff argues that it would be inappropriate deduct the entire basis of $55,385,946.36 from
$419,645,910.91 because only a portion of the court’s award—i.e., only $228,091,000.00 of
$419,645,910.91—is subject to a gross up. Plaintiff calculates that this portion is 54.3% of the
underlying, pre-gross up judgment. Accordingly, plaintiff states that only 54.35% of the basis
should be deducted from the prejudgment amount. 54.35% of $55,385,946.36 (the basis) is
$30,104,036.67. Deducting $30,104,036.67 from $228,091,000.00, plaintiff calculates that it
will realize a taxable gain of $197,986,963.33.
        Plaintiff also calculates that its combined federal and state marginal rate is 37.535%.
Plaintiff reaches this rate by combining its federal tax rate of 35% with its unitary state tax rate,
which adjusted for applicable tax deductions, is 2.535%.5 See JPMC Responses to DOJ
Information Request, Def.’s Ex. 2, ECF No. 376, at 3. Applying this 37.535% rate to the
projected taxable gain of $197,986,963.33, plaintiff concludes that the appropriate gross up is
$118,969,673.71.6

purposes of calculating the gross up, is the pre-gross award of $419,645,910.91, and does not
include the gross up award.
4
  On December 22, 2000, Dime Bancorp, Inc., the successor-in-interest to Anchor Savings Bank,
issued litigation tracking warrants (“LTWs”) to its existing shareholders, representing the value
of the Anchor litigation. Anchor, 2012 WL 387024, at *1 (Fed. Cl. Aug. 31, 2012). When
Washington Mutual, Inc (“WMI”) acquired Dime in 2002, WMI ratified the LTW Agreement,
thereby stepping into the shoes of Dime. Id. According to plaintiff, these LTW “were actively
traded on the NASDAQ market and therefore can serve as a basis to determine the fair market
value of the contingent judgment as of the date of the acquisition of Dime by WMI.” Pl.’s Status
Report, ECF No. 374, at 2 n.1.
5
  JPMC is taxed in multiple state jurisdictions. According to JPMC, “[t]he rate for all unitary
jurisdictions is 3.9%. But, since state and local taxes are deductions for Federal Tax purposes,
the 3.9% becomes 2.535% (3.9% x 65%).” JPMC Responses to DOJ Information Request at 3.
6
 This figure is reached by calculating the difference between the projected taxable gain (i.e.,
$197,986,963.33) and the taxable gain grossed up by 37.535% (i.e., $316,956,637.045). Thus
$316,956,637.045 – 197,986,963.33 = $118,969,673.71.
                                             -4-
        Consistent with these calculations, plaintiff stipulates that “[s]ubject to any unforeseen
events, JPMC intends to report $197,986,963.33 as a taxable gain. Similarly, JPMC intends to
report the tax gross up (either $118,969,672.81, or such other amount as awarded by the Court),
as taxable income.” Def.’s Status Report, ECF No. 376, at 1-2 (quoting JPMC Responses to
DOJ Information Request, Def.’s Ex. 2, at 1). Plaintiff further stipulates that “if the full amount
of the award is ultimately not taxed, JPMC will repay to the government any portion of the gross
up attributed to the portion that is not taxed.” Id. Finally, plaintiff states that it intends “to
[retroactively] amend Form 8594 for the 2008 tax year. For the subsequent years’ tax returns,
JPMC will either file affirmative audit adjustments or will file amended returns to reflect the
consequences of the reallocation of basis.” Id. at 3.

        On June 19, 2015, defendant filed a motion requesting an enlargement of time of 30 days
to obtain additional documentation from plaintiff’s counsel regarding plaintiff’s calculation, the
anticipated timing of plaintiff’s payment of taxes, and plaintiff’s anticipated amendment to its
2008 tax return.7 Def.’s Status Report, ECF No. 375. The court granted this extension, and on
July 20, 2015, defendant submitted a status report addressing plaintiff’s gross up calculation.
See Def.’s Status Report, ECF No. 376. Notably, defendant maintains that “[a]fter considering
Anchor’s responses . . . we are not aware of a basis to challenge Anchor’s calculation at this
time.” Id. at 1. Defendant also “conclude[s] that the calculations appear to be internally
consistent.” Id. at 2. Defendant does not challenge JPMC’s projection of a 37.535% rate. See
Def.’s Status Report, ECF No. 375 at 2–3 (“the only remaining question with respect to the
accuracy of [plaintiff’s] calculation is whether Anchor’s estimate of [JPMC’s] tax basis in the
Anchor lawsuit was correct”).

         Nonetheless, defendant states that “it would be preferable to have Anchor file for gross
up under Rule 60(b) [of the Rules of the U.S. Court of Federal Claims] rather than making the
gross up part of the initial award due to the numerous variables and ambiguities inherent in
assessing [JPMC’s] future tax liability.” Def.’s Status Report, ECF No. 376, at 1. Defendant
supports its argument for deferral of the award by raising the possibility that the IRS may choose
a different method of evaluating the fair market value of the Anchor litigation and come to a
different valuation of Anchor’s tax basis. Id. at 3-4. As the government points out, should the
IRS conclude that the Litigation Tracking Warrants understated the real value of the Anchor
litigation, Anchor’s basis would be higher, and hence the appropriate tax gross up award would
be smaller. Id.; Def.’s Status Report, ECF No. 375, at 3 (suggesting that plaintiff may have
underestimated the value of the Anchor litigation “due to possible depression of the market value
of the LTWs relative to the value of the underlying Anchor lawsuit as of September 2008 due to
Washington Mutual, Inc.’s imminent bankruptcy”).




7
  In its reply brief in defense of its motion for gross up, Anchor stated its intention to
“retroactively amend[] its Form 8594 for the 2008 tax year to allocate a portion of the purchase
price paid for Washington Mutual Bank’s assets to the Anchor judgment.” Pl.’s Reply, ECF No.
338, at 3. In other words, since JPMC acquired the Anchor litigation in 2008, JPMC plans to
amend its tax form so that it properly reflects the tax basis (i.e., the purchase price). On July 6,
2015, Anchor reaffirmed its intention to amend its 2008 tax form. See JPMC Responses to DOJ
Information Request at 3.
                                                -5-
         The court does not find this purported uncertainty sufficient to justify delaying plaintiff’s
gross up award. As explained above, a tax gross up award is awarded based on a projection of
plaintiff’s tax liability, which inevitably entails a certain degree of uncertainty. The Federal
Circuit does not require “absolute exactness or mathematical precision.” Bluebonnet Sav. Bank,
266 F.3d at 1355. “[W]hen damages are hard to estimate,” as they are here due to the absence of
an actual purchase price for the Anchor Litigation, “the burden of imprecision does not fall on
the innocent party.” LaSalle Talman Bank, 317 F.3d at 1374. In this case, the court finds that
the litigation tracking warrants provide a reasonable proxy for the tax basis of the Anchor
litigation. As plaintiff points out, these ownership interests in the Anchor litigation were actively
traded on the NASDAQ market on the day that JPMC acquired them. The courts have, in other
contexts, accepted the notion that information about the value of a corporation or asset is
reflected in the value of a stock. See, e.g., Basic Inc. v. Levinson, 485 U.S. 224, 242-43 (1988).

        Moreover, as defendant acknowledges, the court has, in the past, accepted such
stipulations by plaintiffs, despite the fact that the gross up reflects an estimate of a future tax rate
that would eventually apply once the judgment was received and the tax actually paid. Def.’s
Status Report, ECF No. 376, at 2 (citing Fifth Third Bank v. United States, 71 Fed. Cl. 56, 97
(2006)). In fact, the Court of Federal Claims has routinely included gross ups in Winstar cases
as part of the judgment, based on projections of future tax liability. See, e.g., American Federal
Bank, FSB v. United States, 72 Fed. Cl. 586, 624-26 (2006), aff’d, 295 F.3d App’x 368 (Fed. Cir.
2008); Fifth Third Bank, 71 Fed. Cl. at 94-97, aff’d, 518 F.3d 1368; La Salle Talman Bank,
F.S.B. v. United States, 64 Fed. Cl. 90, 114-18 (2005), aff’d, 462 F.3d 1331, 1338; Home Sav. of
America, F.S.B. v. United States, 57 Fed. Cl. 694, 729-31 (2003), aff’d, 399 F.3d 1341, 1356
(Fed. Cir. 2005).

        Admittedly, the court has, on occasion, deferred calculation of the gross up and
authorized the plaintiff to file a motion, pursuant to Rule 60(b) of the Rules of the Court of
Federal Claims (“RCFC”), if and when tax was paid on the judgment. Nevertheless, the court
has only resorted to this approach when there was uncertainty about whether plaintiff’s award
would be taxable in the first place. For instance, in Bank of America, FSB v. United States, the
court deferred calculation of the gross up because it was uncertain whether the recovery would
be taxed. 67 Fed. Cl. 577, 596-97 (2005). The court deferred calculation of the gross up for
similar reasons in Suess v. United States, 74 Fed. Cl. 510, 514 (2006) and Slattery v. United
States, 73 Fed. Cl. 527, 531 (2006). In this case, however, the government does not dispute the
taxability of the relevant portion of plaintiff’s award or plaintiff’s projection that the award will
be taxed at a combined federal and state marginal rate for JPMC is 37.535%.

        Finally, the court notes that delaying the gross up award is prejudicial to plaintiff, as this
court lacks authority to award plaintiffs any interest. See, e.g., England v. Contel Advanced Sys.,
Inc., 384 F.3d 1372, 1379 (Fed. Cir. 2004) (explaining that the absence of an express statutory
authorization precludes plaintiffs from recovering interest costs). The court finds no justification
for further delay, and accordingly denies defendant’s request to defer the calculation of gross up
award.




                                                 -6-
       For the reasons set forth above, the court finds that plaintiff is entitled to a gross up award
of $118,969,673.71. This court previously held, on May 18, 2015, that plaintiff is entitled to a
pre-gross up judgment of $419,645,910.91. In sum, plaintiff is entitled to recover a total of
$538,615,584.62. Accordingly, the Clerk is hereby directed to enter judgment, and take the
necessary steps to dismiss this matter.

        Additionally, plaintiff’s counsel is directed to report to the court at such time as JPMC
has amended its 2008 tax return and has paid the tax on the award. Accordingly, the Clerk is
directed to enter judgment as setout herein.

       IT IS SO ORDERED.



                                                      s/Lawrence J. Block
                                                      Lawrence J. Block
                                                      Judge




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