           In the United States Court of Federal Claims
                                           No. 13-940C
                                     (Filed: August 24, 2016)

*************************************
SONOMA APARTMENT ASSOCIATES, *
A California Limited Partnership,   *
                                    *                Motion for Partial Summary Judgment on
                      Plaintiff,    *                Tax Gross-Up Claim; Breach of Contract for
                                    *                Failure to Allow Prepayment of Loan
 v.                                 *                Balance; Request for Payment to Neutralize
                                    *                Increase in Overall Tax Burden Resulting
THE UNITED STATES,                  *                From Lump-Sum Damages Award
                                    *
                      Defendant.    *
*************************************

Michael G. Miller, Santa Rosa, CA, for plaintiff.

Jeffrey A. Regner, United States Department of Justice, Washington, DC, for defendant.

                                    OPINION AND ORDER

SWEENEY, Judge

        Plaintiff Sonoma Apartment Associates, a California Limited Partnership, obtained a loan
from the federal government to construct rural low- and moderate-income housing. Plaintiff was
contractually entitled to prepay the balance of the loan after twenty years, but when it sought to
exercise this right, the government denied its request. The government conceded liability for
breach of contract and the case is set for trial on the issue of damages. Currently before the court
is defendant’s motion for partial summary judgment on plaintiff’s claim for a “tax neutralization
payment” to account for the increased tax burden that it would bear in the event of a lump-sum
damages award. For the reasons set forth below, the court denies defendant’s motion.

                                       I. BACKGROUND

                                       A. Factual History

       On September 4, 1984, plaintiff executed an agreement with the Farmers Home
Administration of the United States Department of Agriculture in which the government agreed,
pursuant to section 515 of the Housing Act of 1949, Pub. L. No. 81-171, 63 Stat. 413 (as added
by Pub. L. No. 87-723, § 4(b), 76 Stat. 670, 671-72 (1962)), to lend plaintiff $1,261,080 to
construct a thirty-unit family apartment project at 59 West Agua Caliente Road, Sonoma,
California.1 Plaintiff agreed to repay the loan in installments over a fifty-year period.

        In conjunction with the loan agreement, plaintiff executed two promissory notes in favor
of the government, one for $1,222,650, and the other for $38,430. Both promissory notes
reflected the fifty-year loan repayment period and included the following provision:
“Prepayments of scheduled installments, or any portion thereof, may be made at any time at the
option of Borrower providing the loan is in a current status.” The promissory notes, in turn, were
secured by a deed of trust that included a rider containing the following language:

       The borrower and any successors in interest agree to use the housing for the
       purpose of housing people eligible for occupancy as provided in section 515 of
       Title V of the Housing Act of 1949 and [Farmers Home Administration]
       regulations then extant during this 20-year period, beginning the date this
       instrument is filed of record.

The deed of trust was recorded on October 28, 1985.

        After plaintiff executed the loan agreement, the promissory notes, and the deed of trust,
Congress enacted two statutes that retroactively limited a borrower’s right to prepay the balance
of a loan made pursuant to section 515 of the Housing Act of 1949: the Emergency Low Income
Housing Preservation Act of 1987 (“ELIHPA”), Pub. L. No. 100-242, 101 Stat. 1877 (1988), and
the Housing and Community Development Act of 1992, Pub. L. No. 102-550, 106 Stat. 3672.

       Plaintiff provided housing to eligible individuals for the twenty-year period described in
the deed of trust rider. Subsequently, on November 5, 2010, plaintiff submitted a written request
to Rural Development–the agency within the United States Department of Agriculture
responsible for the rural housing programs formerly administered by the Farmers Home
Administration–to prepay the balance of its loan. On January 3, 2011, Rural Development
offered plaintiff certain incentives in lieu of accepting prepayment. Plaintiff rejected the offer,
and on January 7, 2011, Rural Development rejected plaintiff’s prepayment request.

                                       B. Procedural History

        Plaintiff filed suit in the United States Court of Federal Claims (“Court of Federal
Claims”) on November 27, 2013, alleging that Rural Development improperly refused its request
to prepay the balance of its loan. It thereafter filed an amended complaint in which it asserted
two claims for relief: breach of contract and a violation of the Takings Clause of the Fifth
Amendment to the United States Constitution. After the parties concluded fact discovery,
plaintiff filed a motion for partial summary judgment as to the government’s liability for breach
of contract and defendant filed a motion to dismiss plaintiff’s Fifth Amendment takings claim.


       1
           All facts are undisputed.

                                                -2-
In a December 30, 2015 Opinion and Order, the court granted both motions. As a result, the sole
remaining issue was the amount of damages, if any, due plaintiff for the government’s breach of
contract.

        On May 2, 2016, the parties exchanged expert reports on the issue of damages. The
report of one of plaintiff’s experts–Barry Ben-Zion, Ph.D.–contained a new claim for a “tax
neutralization payment.” Def.’s App. 12. Dr. Ben-Zion explained:

       If Sonoma Apartment Associates is awarded the past and future loss of net
       income, the entire amount of the award, if paid by defendant, would be taxable to
       the partners in a single year. Because of the progressive nature of both Federal
       and State income taxation, the partners would suffer a tax penalty on the award
       compared with the income taxes they would have had to pay had they earned their
       share of the net income sequentially during the entire period of loss (2011 through
       2035). To neutralize the effect of this adverse tax consequence, a neutralizing
       payment must be added.

Id. Shortly after receiving this report, defendant filed a motion for partial summary judgment,
contending that plaintiff is not entitled to recover a payment to neutralize the negative
consequences of receiving a lump-sum damages award. The parties have fully briefed
defendant’s motion, and the court deems oral argument unnecessary.

                                       II. DISCUSSION

                             A. Motions for Summary Judgment

        Summary judgment is appropriate when there is no genuine issue of material fact and the
moving party is entitled to a judgment as a matter of law. R. Ct. Fed. Cl. 56(a); Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986). A fact is material if it “might affect the outcome of the suit
under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). An issue
is genuine if it “may reasonably be resolved in favor of either party.” Id. at 250. Entry of
summary judgment is mandated against a party who fails to establish “an element essential to
that party’s case, and on which that party will bear the burden of proof at trial.” Celotex Corp.,
477 U.S. at 322. The parties have not identified any genuine issue of material fact that would
preclude the court from ruling on defendant’s motion.

                                  B. Tax Gross-Up Damages

        The gravamen of plaintiff’s breach-of-contract claim is that the government’s refusal to
allow it to prepay the balance of its loan prevented it from obtaining rental income at market
rates from the date of the government’s refusal through the end of the fifty-year loan repayment
period (in other words, from January 27, 2011, through September 4, 2034). Plaintiff therefore
seeks compensation from the government for its lost rental income. Any lost rental income


                                               -3-
recovered by plaintiff in this lawsuit would be paid as a lump sum, and that lump-sum payment
would be taxable income for plaintiff. See 26 U.S.C. § 61(a) (2012) (indicating that “[e]xcept as
otherwise provided . . . , gross income means all income from whatever source derived”2); Jones
v. Corbyn, 186 F.2d 450, 453 (10th Cir. 1950) (“Generally, amounts received as damages in
litigation are ordinary income.”). In contrast, had the government allowed plaintiff to prepay the
balance of its loan, plaintiff would have received market rate rental income on a periodic basis,
and then included that rent as gross income on its income tax returns. See 26 U.S.C. § 61(a)
(defining “gross income” as including rent). Plaintiff contends that its overall tax liability would
be significantly greater with the receipt of a one-time lump-sum damages award compensating
for all past and future lost rental income than it would have been with the receipt of periodic rent
payments over the course of two decades.3 Thus, plaintiff asserts its additional tax burden as a
specific element of damages and seeks compensation to neutralize the disparity.

        In its motion for partial summary judgment, defendant refers to plaintiff’s request for a
tax neutralization payment as a tax gross-up claim because plaintiff seeks to “gross up” its
damages award to offset its purported increased tax burden. Defendant contends that under
binding precedent from the United States Court of Appeals for the Federal Circuit (“Federal
Circuit”), plaintiff is not entitled to a tax gross-up payment. Plaintiff disagrees, arguing that the
Federal Circuit precedent relied upon by defendant does not apply to its request for a tax
neutralization payment. To provide the appropriate context for these arguments, the court
prefaces its analysis with a survey of case law pertaining to tax neutralization claims.4

                                   1. Federal Circuit Case Law

       The court first examines the binding precedent of the Federal Circuit. See Coltec Indus.,


       2
           When plaintiff filed this lawsuit, the Internal Revenue Code contained one exception to
this rule that pertained to damages received as the result of a lawsuit: Gross income did not
include “the amount of any damages (other than punitive damages) received (whether by suit or
agreement and whether as lump sums or as periodic payments) on account of personal physical
injuries or physical sickness[.]” 26 U.S.C. § 104(a)(2). Congress added another damages-related
exception in 2015: “In the case of any wrongfully incarcerated individual, gross income shall not
include any civil damages, restitution, or other monetary award (including compensatory or
statutory damages and restitution imposed in a criminal matter) relating to the incarceration of
such individual for the covered offense for which such individual was convicted.” 26 U.S.C.
§ 139F(a) (Supp. III 2016).
       3
          Although the court recognizes that the increased tax burden would ultimately be borne
by plaintiff’s constituent partners, it refers to “plaintiff’s” tax burden and tax liability for
simplicity.
       4
          The survey includes decisions cited and relied upon by the parties, as well as decisions
that the court deems relevant.

                                                 -4-
Inc. v. United States, 454 F.3d 1340, 1353 (Fed. Cir. 2006) (“There can be no question that the
Court of Federal Claims is required to follow the precedent of the Supreme Court, our court, and
our predecessor court, the Court of Claims.”). The Federal Circuit initially addressed tax gross-
up claims in Home Savings of America, FSB v. United States, 399 F.3d 1341 (Fed. Cir. 2005).
That case arose from the savings and loan crisis of the late 1970s and early 1980s, during which
many savings and loan institutions–referred to as thrifts–failed. Id. at 1344-45. The Federal
Savings and Loan Insurance Corporation insured the deposits in those thrifts, but did not have
sufficient funds to cover all of the losses. Id. at 1345. Thus, the federal government arranged for
healthy thrifts to acquire the failing thrifts and assume their liabilities in exchange for “special
accounting treatment, according to which they would be permitted to count supervisory goodwill
toward meeting their reserve capital requirements.” Id. (footnote omitted); see also id. at 1345
n.1 (“Supervisory goodwill is the excess of the purchase price paid for a thrift over the fair value
of all identifiable assets acquired.”). After the Home Savings of America plaintiffs entered into
such an agreement with the federal government and acquired several failing thrifts, Congress
enacted the Financial Institution Reform, Recovery, and Enforcement Act of 1989, “which
breached various agreements by the government to allow thrifts to count supervisory goodwill.”
Id. at 1345. Concluding that plaintiffs were entitled to compensation for the government’s
breach, the Court of Federal Claims awarded damages to the plaintiffs to account for forty years
of lost supervisory goodwill, and then grossed up the damages award “to compensate for the
taxes that [the plaintiffs] would pay on the award.” Id. at 1346.

        On appeal, the government argued that grossing up the damages award was improper
because (1) the recipient was “unlikely to pay taxes on [the] award given its ability to draw on
tax planning resources” and (2) “future tax rates are unknown, so adjusting damages based on
projected rates [would be] speculative.” Id. at 1355-56. The plaintiffs countered that (1)
“[b]ecause the damages must reflect after-tax harm, . . . [the recipient of the damages award]
would not be made whole without a tax gross-up” and (2) the “uncertainty over future tax rates
[was] minor . . . and . . . that such concerns should not preclude recovery because the burden of
imprecision falls on the breaching party, the government.” Id. at 1356. Ultimately, the Federal
Circuit “adopt[ed] the rule of other courts that a tax gross-up is appropriate when a taxable award
compensates a plaintiff for lost monies that would not have been taxable.” Id. (citing Oddi v.
Ayco Corp., 947 F.2d 257, 267 (7th Cir. 1991); First Nationwide Bank v. United States, 56 Fed.
Cl. 438, 449 (2003); LaSalle Talman Bank, F.S.B. v. United States, 45 Fed. Cl. 64, 110 (1999),
aff’d in part and vacated in part, 317 F.3d 1363 (Fed. Cir. 2003)). Because it was “not clearly
erroneous” for the Court of Federal Claims to find that its damages award constituted
compensation for “lost monies that would not have been taxable,” the Federal Circuit “affirm[ed]
the court’s tax gross-up of the award.” Id.; accord LaSalle Talman Bank, F.S.B. v. United States,
462 F.3d 1331, 1338 (Fed. Cir. 2006) (affirming the tax gross up of a damages award meant to
compensate the plaintiff for the loss of favorable accounting treatment for supervisory goodwill);
see also Bank of Am., FSB v. Doumani, 495 F.3d 1366, 1374 (Fed. Cir. 2007) (acknowledging,
in another savings and loan case, the propriety of grossing up a damage award to compensate for
the loss of nontaxable monies, but affirming the decision of the Court of Federal Claims not to



                                                -5-
gross up the damages award in that case due to the record’s ambiguity “on the taxability of the
recovery” and the fact that the plaintiff’s tax rate was “highly variable”).

         Two years later, in Carabetta Enterprises, Inc. v. United States, 482 F.3d 1360 (Fed. Cir.
2007), the Federal Circuit again examined the tax gross-up issue, but under different factual
circumstances. In that case, the plaintiffs owned and managed properties that “provided low-
income rental housing under several programs sponsored by” the United States Department of
Housing and Urban Development (“HUD”). Id. at 1362. The plaintiffs had acquired the
properties using mortgages insured by the federal government pursuant to sections 221(d)(3) and
236 of the National Housing Act, which permitted the prepayment of loan balances after twenty
years. Id. However, after the plaintiffs executed their mortgage agreements, Congress enacted
ELIHPA and the Low-Income Housing Preservation and Resident Homeownership Act of 1990,
Pub. L. No. 101-625, 104 Stat. 4249, preventing the plaintiffs from prepaying the balance of their
loans without HUD’s prior approval. Carabetta Enters., 482 F.3d at 1363. The statutes did,
however, “authorize[] HUD to guarantee private loans on the properties”–referred to as “section
241(f) equity loans”–so long as “the properties would continue to operate as low-income housing
and . . . the property owners satisfied certain other requirements.” Id. Pursuant to this provision,
the plaintiffs executed Repayment Agreements with HUD. Id. But before HUD finished
processing the necessary paperwork, Congress enacted the Departments of Veterans Affairs and
Housing and Urban Development, and Independent Agencies Appropriations Act, 1997, Pub. L.
No. 104-204, 110 Stat. 2874 (1996), which “prohibit[ed] HUD from insuring any more section
241(f) equity loans,” Carabetta Enters., 482 F.3d at 1363. Instead, HUD was authorized to issue
$75 million in interest-free capital loans, to be distributed at HUD’s discretion. Id. at 1363-64.
Because HUD chose to distribute the $75 million in such a way that the plaintiffs did not receive
all of the funds to which they were entitled under the Repayment Agreements, the plaintiffs
brought suit for breach of contract. Id. at 1364. The Court of Federal Claims found that the
government breached the Repayment Agreements and awarded damages. Id. However, in
calculating damages, the court denied the plaintiffs’ request for “a ‘tax gross-up’ on the proceeds
of the capital loans that should have been issued[.]” Id.

       On appeal, “[t]he parties agree[d] that the capital loans [the plaintiffs] would have
received absent the breach would have been tax-free, but that the damages award [they would]
receive is taxable.” Id. at 1366-67. The plaintiffs therefore argued that given “the differing tax
treatment accorded to funds that would have been obtained through actual performance and to
the funds that [would] be obtained pursuant to a damages award,” they were “entitled to an
increase in the amount of the award to offset the taxes [they would] be required to pay.” Id. at
1367. The Federal Circuit rejected the plaintiffs’ argument, explaining:

               While it is true that a “tax gross-up” is appropriate when a taxable award
       compensates a plaintiff for lost monies that would not have been taxable, that is
       not the case here because [the plaintiffs are] not being compensated for the loss of
       untaxable funds. The measure of [the plaintiffs’] expectation damages is the
       amount [they] would have gained from receiving the capital loans. Because [the


                                                -6-
        plaintiffs] would have had to repay the loans, the only benefit [the plaintiffs]
        would have realized from each loan was the investment income earned on the
        principal minus any interest [they] would have been required to pay over the life
        of the loan. HUD’s capital loans were interest-free, meaning that [the plaintiffs’]
        benefit would be measured by the total amount of the loan’s investment income.

                . . . . Because the capital loans would have been provided on an
        interest-free basis, the amount [the plaintiffs] would have received under the
        contract[s] is the same as the amount [they] would have had to repay.
        Accordingly, the only difference between the two amounts is the adjustment to
        present value. Since the adjustment to present value is a way of accounting for
        the estimated value of interest over time, [the plaintiffs’] damages model simply
        takes into account the amount of interest, in today’s dollars, that would
        accumulate over the life of the loan. That is another way of describing investment
        income. Because . . . investment income from tax-free money is taxable, [the
        plaintiffs’] lost income would have been taxable and thus [the plaintiffs are] not
        entitled to a tax gross-up.

Id. (citation omitted).

                          2. Case Law From Outside of the Federal Circuit

       The United States Courts of Appeals in other circuits have also addressed tax gross-up
claims. The decisions of these courts, while “accorded great weight,” are not binding on the
Federal Circuit, Admiral Fin. Corp. v. United States, 378 F.3d 1336, 1340 (Fed. Cir. 2004), or on
the Court of Federal Claims, Bankers Tr. N.Y. Corp. v. United States, 225 F.3d 1368, 1371 (Fed.
Cir. 2000). Several of these decisions touch upon the issue raised by plaintiff in this case and are
worthy of note and discussion.

                                     a. Decisions in Tort Cases

        First, some federal appellate courts have held that a tax gross-up payment is appropriate
in personal injury and wrongful death cases when damages are meant to compensate for lost
future earnings, which are typically calculated on an after-tax basis; in such cases, the lack of a
tax gross-up payment would result in the plaintiffs paying taxes twice, once because income
taxes were subtracted from the lost future earnings and again when they received income from
investing their damages award. See, e.g., Sosa v. M/V Lago Izabal, 736 F.2d 1028, 1034 (5th
Cir. 1984) (“[O]ne appropriate method of taking [a wage earner’s income tax] into account is by
increasing the lump sum damage award by the amount of income tax that would have to be paid
on the earnings of the award.”); DeLucca v. United States, 670 F.2d 843, 843-44 (9th Cir. 1982)
(affirming the district court’s award of compensation for “income taxes on the investment
earnings of the lump sum award”).



                                                -7-
                      b. Decisions in Employment Discrimination Cases

        In addition, several federal appellate courts have addressed, in employment
discrimination cases, whether a tax gross up of a lump-sum back pay award is appropriate when
the plaintiffs’ overall tax liability increased as a result of the award. The decisions of these
courts reveal a split among the circuits. Three courts–the United States Court of Appeals for the
Third Circuit (“Third Circuit”), the United States Court of Appeals for the Seventh Circuit
(“Seventh Circuit”), and the United States Court of Appeals for the Tenth Circuit (“Tenth
Circuit”)–have concluded that a tax gross-up payment was appropriate in these circumstances.
See EEOC v. N. Star Hosp., Inc., 777 F.3d 898, 904 (7th Cir. 2015) (“Upon [the employee’s]
receipt of . . . back pay, taxable as wages in the year received, [the employee] will be bumped
into a higher tax bracket. The resulting tax increase, which would not have occurred had he
received the pay on a regular, scheduled basis, will then decrease the sum total he should have
received had he not been unlawfully terminated . . . . Put simply, without the tax-component
award, he will not be made whole, a result that offends [the] remedial scheme [of Title VII of the
Civil Rights Act of 1964 (“Title VII”)]. . . . [T]he district court did not abuse its wide discretion
in granting this . . . equitable remedy.” (citation omitted)); Eshelman v. Agere Sys., Inc., 554
F.3d 426, 440-43 (3d Cir. 2009) (holding, in light of the “‘make whole’ remedial purpose” of
antidiscrimination statutes such as the Americans With Disabilities Act, that granting the plaintiff
“an additional monetary award to offset the negative tax consequences of the back pay award . . .
was warranted because the taxes [the plaintiff] would have to pay on the lump sum award of back
pay would be higher than what she would have paid had she received this pay in the normal
course of employment (i.e., in the absence of discrimination)”); Sears v. Atchison, Topeka &
Santa Fe Ry., 749 F.2d 1451, 1456 (10th Cir. 1984) (“[T]he district court did not abuse its
discretion when it included a tax component in the back pay award to compensate class members
for their additional tax liability as a result of receiving over seventeen years of back pay in one
lump sum. . . . [T]he trial court has wide discretion in fashioning remedies to make victims of
discrimination whole. A tax component may not be appropriate in a typical Title VII case. But
this case presents special circumstances in view of the protracted nature of the litigation. The
court-ordered back pay awards will likely place the living members of the class in the highest
income tax bracket on much of the back pay they now receive.” (citations omitted)).

        In contrast, two courts–the United States Court of Appeals for the District of Columbia
Circuit (“D.C. Circuit”) and the United States Court of Appeals for the Eighth Circuit (“Eighth
Circuit”)–have rejected tax gross-up payments in these circumstances, providing distinct
rationales for their conclusions. The court first examines the D.C. Circuit’s rationale. The D.C.
Circuit initially confronted the issue in Dashnaw v. Peña, a case involving a violation of the Age
Discrimination in Employment Act by the Federal Maritime Administration, a division of the
United States Department of Transportation. 12 F.3d 1112, 1113-14 (D.C. Cir. 1994). On
appeal, the plaintiff argued “that the District Court should have granted him additional
compensation to help cover the higher taxes he [would] have to pay because he will receive his
backpay in a lump sum rather than as salary paid out over a period of years.” Id. at 1116. The
D.C. Circuit noted that “the general rule that victims of discrimination should be made whole


                                                -8-
does not support ‘gross-ups’ of backpay to cover tax liability,” and held that “[g]iven the
complete lack of support in existing case law for tax gross-ups,”5 it would not “extend the law in
this case.” Id. The D.C. Circuit reaffirmed this holding in Fogg v. Gonzales, a case involving a
violation of Title VII by the United States Marshals Service, a division of the United States
Department of Justice. 492 F.3d 447, 449, 455-56 (D.C. Cir. 2007). In that case, the district
court increased the amount of damages it awarded to plaintiff for back pay “to offset the adverse
tax consequences of a lump sum award . . . .” Id. at 449. The government challenged the tax
gross-up payment on appeal as contrary to the holding in Dashnaw. Id. at 455. In response, the
plaintiff attempted to distinguish Dashnaw based on the relative sizes of the back pay awards and
the relative delays in obtaining the awards. Id. at 455-56. The D.C. Circuit rejected the
plaintiff’s argument, noting that the holding in Dashnaw was based on the absence of any case
law supporting tax gross-up payments, and “not upon the lack of delay or the size of the award in
that particular case.” Id. at 456. It therefore “reverse[d] the judgment of the district court insofar
as it increased [the plaintiff’s] back pay award to account for his higher tax liability.” Id.

        By comparison, the Eighth Circuit, in rejecting a tax gross-up claim in a discrimination
suit brought against the Social Security Administration, did so on a more specific basis–that the
Rehabilitation Act of 1973 did not waive the government’s sovereign immunity so as to permit a
tax gross-up claim.6 Arneson v. Callahan, 128 F.3d 1243, 1244-45, 1247 (8th Cir. 1997). In
Arneson, the district court awarded the plaintiff “additional monies to compensate [him] for the
adverse tax consequences from receiving back pay in two payments . . . .” Id. at 1247. The
federal government challenged the award on appeal, arguing that (1) such an award was not
available under the statute (which incorporated Title VII’s remedies) and (2) if such an award
were available, Congress had not waived sovereign immunity for such an award. Id. The Eighth
Circuit agreed with the latter argument, holding:

       We do not believe that Congress has authorized the tax enhancement remedy
       against the federal government. Nowhere within the statutory framework of the
       Rehabilitation Act or Title VII[] has Congress expressly waived sovereign
       immunity from tax enhancement damages. The mere fact that Congress intended




       5
         The D.C. Circuit neglected to address the Sears decision, which did allow a tax gross-
up payment in an employment discrimination suit and was issued by the Tenth Circuit nine years
earlier.
       6
          Notably, the Eighth Circuit has also upheld a district court’s refusal to gross up a lump-
sum payment of pension benefits in a Title VII case brought against a private employer because
the plaintiff “failed to present evidence of the enhancement’s amount or a convenient way for the
court to calculate the amount at the time the court announced its judgment.” Hukkanen v. Int’l
Union of Operating Eng’rs, Hoisting & Portable Local No. 101, 3 F.3d 281, 287 (8th Cir. 1993).

                                                 -9-
       that discrimination victims receive a full measure of back pay does not amount to
       an unequivocal and express waiver of sovereign immunity.

Id. It therefore reversed the district court’s award. Id.

                            c. Decisions in Breach-of-Contract Cases

        Finally, several federal appellate courts have considered the propriety of increasing
damages awards to offset additional income tax liability in breach-of-contract cases. For
example, in Paris v. Remington Rand, Inc., a case before the United States Court of Appeals for
the Second Circuit (“Second Circuit”), private parties executed a contract pursuant to which the
defendant agreed to pay royalties to the plaintiff for his invention–a mechanism used in
tabulating machines. 101 F.2d 64, 65 (2d Cir. 1939). Five years later, the defendant began using
a new model of tabulating machine and ceased paying royalties to the plaintiff. Id. The plaintiff
brought suit, alleging that the new model incorporated his invention and that, as a result, he
remained entitled to royalties. Id. The district court agreed, and awarded royalties to the
plaintiff. Id. at 67-68. It also awarded to the plaintiff “an amount of damages for additional
income tax” that the plaintiff would be required to pay as a result of receiving the royalties in a
lump sum rather than over the course of several years. Id. at 68. On appeal, the Second Circuit
rejected this “tax differential” award, explaining:

       To calculate such an item of damages permits of wide speculation. If such
       damages are awarded, the amount of tax differential will depend on the method by
       which [the plaintiff] has kept his books–cash or accrual basis. Damages would
       vary in each instance. Another consideration would be the taxpayer’s financial
       position and other earnings of the year which would enter into the calculations so
       that it would be highly speculative to find the amount of the damages due to [the
       defendant’s] breach of contract. Such variation of tax is not a consequential
       damage flowing from the breach of contract.

Id.

        The Seventh Circuit has also considered the propriety of tax gross-up claims in breach-of-
contract cases on at least two occasions. In Oddi, the plaintiff sought advice from a financial
planner hired by his employer regarding how he should invest the funds in his employer’s profit-
sharing plan upon his retirement. 947 F.2d at 259-60. The plaintiff was advised that he could
either take a lump-sum distribution of the funds (which would result in taxable income) or roll
over the funds to an individual retirement account (which would result in the deferral of income
taxes until the funds were withdrawn). Id. Because the financial planner advised that a lump-
sum distribution was financially advantageous, the plaintiff chose that option. Id. at 260.
However, the plaintiff subsequently discovered that the financial planner’s calculations were
flawed, and that it would have been more advantageous–by $2 million–to roll over the funds to
an individual retirement account. Id. He therefore “filed suit in both contract and tort for the


                                                 -10-
difference between the projected return on his deferred-income investment and the same under
the lump-sum plan.” Id. at 261. The district court awarded the plaintiff “$483,088 as the present
value of damages sustained plus income tax on the award.” Id. On appeal, the defendant
contended that it was legal error for the district court to gross up the damages award. Id. at 267.
In response, the Seventh Circuit observed:

       Generally courts do not increase damages to compensate for expected tax liability
       on the damage award.7 When damages place a plaintiff in the position he would
       have occupied had the defendant’s obligation been fulfilled, the amount recovered
       would (but for the breach) have been income, and thus taxable. Since the plaintiff
       would have paid taxes even absent the breach, he should not be compensated for
       the taxes he will have to pay on the damage award he receives as a result of the
       breach.

Id. (footnote added) (citation omitted). The general rule notwithstanding, the Seventh Circuit
stated that a tax gross-up payment may be appropriate in certain circumstances, remarking that
“[c]ourts have adopted a pragmatic approach to the question of accounting for income taxes on
damage awards,” id. (citing Sosa, 736 F.2d at 1033-34; DeLucca, 670 F.2d at 845), and that “the
case before [it] call[ed] for a practical approach,” id. It explained:

       Although occurring in a contract setting, defendant’s error did not deprive
       plaintiff of taxable income. The entire purpose of comparing the deferred-income
       plan and the lump-sum plan was to predict which one would produce the greatest
       after-tax fund of capital for [the plaintiff’s] estate. Therefore, damages in the case
       were computed as if taxes had already been paid on either basis–this being the
       appropriate way to compare the differential between the two plans. [The plaintiff]
       will now incur a new tax on the damages awarded to reflect the differential, one
       never required had he followed the deferred-income plan from the beginning.
       This new tax is solely the result of [the defendant’s] mistake, and the [defendant]
       must therefore compensate him for the taxes thus imposed.

Id.

        The Seventh Circuit acknowledged its holding in Oddi several years later in Medcom
Holding Co. v. Baxter Travenol Labs., Inc., 106 F.3d 1388, 1404 (7th Cir. 1997). In that case,
the defendant breached a stock purchase agreement by failing to transfer certain stock to the
plaintiff. Id. at 1403. The district court granted specific performance and directed the transfer of
the stock. Id. It then awarded equitable compensation to the plaintiff to account for the tax
benefits that the defendant received from improperly possessing the stock. Id. On appeal, the
plaintiff argued that the district court erred in not grossing up the equitable compensation to



       7
           The Seventh Circuit did not provide a citation for this proposition.

                                                 -11-
account for the income taxes it would incur upon receiving the compensation. Id. at 1404. The
Seventh Circuit disagreed:

       We give great deference to the district court in exercising its equitable discretion.
       The district court concluded that compensating for tax effects was inappropriate
       and speculative. In Oddi, we noted that the party seeking an increase in an award
       to reflect tax effects bears the “burden of presenting evidence that shows that he
       will be liable for the prescribed amount of taxes.” [947 F.2d] at 268. We cannot
       say that the district court abused its discretion in refusing to increase the damage
       award to reflect potential tax effects.

Id.; see also Medcom Holding Co. v. Baxter Travenol Labs., Inc., No. 87 C 9853, 1995 WL
609125, at *5 (N.D. Ill. Oct. 13, 1995) (containing the district court’s rationale for rejecting the
plaintiff’s tax gross-up claim: “[The plaintiff’s reasoning] requires the court to speculate as to
post-judgment tax consequences of an award. It is generally inappropriate to consider
hypothetical post-judgment tax consequences when formulating awards. [The plaintiff] has
failed to provide any precedent to the contrary.”), aff’d, 106 F.3d at 1388.

         Finally, the Tenth Circuit has also addressed the propriety of a tax gross-up claim in a
breach-of-contract case. In O’Toole v. Northrop Grumman Corp., the defendant breached its
agreement to reimburse the plaintiff’s relocation expenses. 499 F.3d 1218, 1220 (10th Cir.
2007). The district court awarded consequential damages, but denied the plaintiff’s request for a
tax gross-up payment. Id. at 1220-21, 1226. Plaintiff appealed the latter ruling, arguing that
under New York law, he was entitled to “be put back in the same economic position as he would
have been in if [the defendant] had not breached the contract.” Id. at 1226; see also id. at 1227
(reflecting that the defendant’s policy “provide[d] for gross-up on consequential damages in that
it was . . . policy to make relocations financially neutral to employees”). The defendant
responded “that courts generally do not increase damage awards to offset the effect of taxes,” id.
at 1227 (citing Medcom Holding, 106 F.3d at 1404), but acknowledged “that courts do gross-up
damage awards ‘when a taxable award compensates a plaintiff for lost monies that would not
have been taxable,’” id. (quoting Home Sav. of Am., 399 F.3d at 1356). However, the defendant
did not “go through the district court’s damage awards to show how these principles appl[ied] to
the facts of this case,” and there was no basis for the Tenth Circuit to make the determination
itself. Id. Therefore, the Tenth Circuit remanded the issue to the district court with the following
guidance:

       [T]he parties [are to] explain to the district court whether [the plaintiff’s] damage
       awards are taxable and whether they replace monies that would not have been
       taxable. Given that [the plaintiff] was awarded both earnings and earnings on
       earnings, as well as reimbursement for funds withdrawn from his retirement
       account to pay taxes and penalties on funds withdrawn to pay undisputed
       relocation costs, there may well be some significant parsing out regarding what



                                                 -12-
       should and should not be grossed up. The principles set forth in Medcom
       [Holding] and Home Savings of America should guide the district court’s
       determinations regarding same.

Id.

            C. Plaintiff’s Claim for a Tax Neutralization Payment Is Permissible

        As noted above, defendant argues that the binding precedent of the Federal Circuit is
controlling in this case. In particular, it argues that the Federal Circuit

       has drawn a bright line for the recovery of a tax gross-up. A tax gross-up is
       appropriate when a taxable award compensates a plaintiff for lost monies that
       would not have been taxable. [Home Sav. of Am., 399 F.3d at 1356]. However,
       in the case . . . where the taxable award compensates for taxable losses, a tax
       gross-up is not a recoverable element of damages. [Carabetta Enters., 482 F.3d at
       1367].

Mot. 8. Defendant asserts that because the increased income that plaintiff would have received
absent the government’s breach of contract was taxable, any damages award that compensates
plaintiff for its lost income is also taxable. Therefore, defendant contends, plaintiff’s tax gross-
up claim should be dismissed as a matter of law.

        Plaintiff disputes defendant’s characterization of its claim. It asserts that it is not seeking
to avoid paying income tax on the market rate rental income it would have received in the
absence of the government’s breach of contract. Rather, plaintiff states that it is merely
requesting that it not be required to pay any income tax beyond what it would have paid had it
received market rate rental income from the date that it sought to prepay the balance of its loan.
Plaintiff argues that the Federal Circuit has not considered such a request, and that this court
should look to other case law for guidance.

         The court agrees with plaintiff that the Federal Circuit’s decision in Carabetta Enterprises,
upon which defendant relies, does not specifically address the type of claim that plaintiff asserts
in this case. In Carabetta Enterprises, the plaintiffs were deprived of interest-free loans as a
result of the government’s breach of contract. 482 F.3d at 1367. The measure of the plaintiffs’
damages was the present value of the interest that they would have earned from investing the
proceeds of those loans. Id. The interest income and the damages awards were both taxable
amounts. Id. The Federal Circuit therefore rejected the plaintiffs’ assertion that the funds they
would have obtained “through actual performance” and the funds they would obtain “pursuant to
the damages award” were subject to a “differing tax treatment,” and accordingly affirmed the
denial of their tax gross-up claim. Id. In other words, the Federal Circuit concluded that if a
plaintiff’s lost income is taxable, then damages based on that lost income are also taxable.



                                                 -13-
        The plaintiffs in Carabetta Enterprises did not argue, as plaintiff does here, that the
income tax they would owe on their damages awards was greater than the income tax that they
would have owed on their interest income. Consequently, the Federal Circuit did not have the
occasion to address whether a tax gross-up payment could be used to offset an increase in the tax
burden a plaintiff might face as a result of receiving a lump-sum damages award instead of a
stream of income spread over the course of many years. Thus, its ruling in Carabetta Enterprises
does not bind this court on the issue presented by plaintiff. See Webster v. Fall, 266 U.S. 507,
511 (1925) (“Questions which merely lurk in the record, neither brought to the attention of the
court nor ruled upon, are not to be considered as having been so decided as to constitute
precedents.”); JVC Co. of Am., Div. of US JVC Corp. v. United States, 234 F.3d 1348, 1353
(Fed. Cir. 2000) (“Because neither of these cases cited by [the plaintiff] explicitly addressed the
question . . . , they are not precedent concerning that issue.”); Nat’l Cable Television Ass’n v.
Am. Cinema Editors, Inc., 937 F.2d 1572, 1581 (Fed. Cir. 1991) (“When an issue is not argued
or is ignored in a decision, such decision is not precedent to be followed in a subsequent case in
which the issue arises.”).

        Because the Federal Circuit has not addressed the propriety of the type of tax
neutralization payment claimed by plaintiff, the court examines the case law from other circuits.
The most relevant decisions are those issued in breach-of-contract cases by the Second, Seventh,
and Tenth Circuits. As noted above, the Second Circuit concluded that the tax neutralization
payment sought by the plaintiff was too speculative to warrant recovery. Paris, 101 F.2d at 68.
Similarly, the Seventh Circuit affirmed the ruling of the district court, under an abuse-of-
discretion standard, that the tax neutralization claim was too speculative.8 Medcom Holding, 106
F.3d at 1404. And, the Tenth Circuit directed the district court to consider the plaintiff’s tax
gross-up claim in light of the principles set forth in Medcom Holding (which restated the
principles set forth in Oddi) and Home Savings of America–in other words, that courts generally
do not increase a damages award to compensate for the expected increase in tax liability resulting
from the award unless the award was meant to compensate for tax-free income. O’Toole, 499
F.3d at 1227. In short, in the Second and Seventh Circuits, tax neutralization claims are not
foreclosed in breach-of-contract cases, but plaintiffs must establish that their claims are more
than speculative to prevail. In contrast, in the Tenth Circuit, the type of tax neutralization
payment that plaintiff seeks here appears to be prohibited in breach-of-contract cases.

        Although the Second and Seventh Circuits do not provide a definitive standard for
assessing tax neutralization claims, they appear to allow for the award of a tax neutralization
payment if a plaintiff presents preponderant evidence of the amount of the payment to which it is
entitled. This court agrees with such an approach. Plaintiffs in this court should be allowed to
present evidence regarding the amount that their overall tax burden would be increased by a
damages award that compensates them for their lost income, and if that evidence reflects that the
tax differential can be ascertained with reasonable certainty, then the court should consider


       8
          The other Seventh Circuit decision, Oddi, does not address the type of tax
neutralization claim asserted by plaintiff.

                                               -14-
allowing recovery of a tax neutralization payment.9 See Medcom Holding, 106 F.3d at 1404;
Paris, 101 F.2d at 68; see also Bank of Am., 495 F.3d at 1374 (affirming the decision of the
Court of Federal Claims not to gross up the damages award due, in part, to the fact that the
plaintiff’s tax rate was “highly variable”); Anchor Sav. Bank, FSB v. United States, 123 Fed. Cl.
180, 185 (2015) (rejecting the suggestion that a tax gross-up payment was improper due to the
“numerous variables and ambiguities inherent in assessing [the plaintiff’s] future tax liability”
because such payments are “based on a projection of plaintiff’s tax liability, which inevitably
entails a certain degree of uncertainty” and “[t]he Federal Circuit does not require ‘absolute
exactness or mathematical precision.’” (quoting Bluebonnet Sav. Bank, F.S.B. v. United States,
266 F.3d 1348, 1355 (Fed. Cir. 2001))). The purpose of a tax gross-up payment in a breach-of-
contract suit is to “ensure that damages awarded effectively compensate plaintiffs for the harm
caused by defendant’s action.” Anchor Sav. Bank, 123 Fed. Cl. at 183. In short, damages should
make the nonbreaching party whole. Id.; Anchor Sav. Bank, FSB v. United States, 597 F.3d
1356, 1361 (Fed. Cir. 2010) (“Damages for breach of contract are designed to make the
non-breaching party whole.”); Ind. Mich. Power, 422 F.3d at 1373 (“The remedy for breach of
contract is damages sufficient to place the injured party in as good a position as it would have
been had the breaching party fully performed.”). If plaintiff here can prove, by a preponderance
of evidence, that a lump-sum damages award would result in it paying more taxes than it would
have paid in the absence of the breach of contract, then it is made whole only if it receives a
payment to offset its increased tax burden. Indeed, if plaintiff can make the requisite showing, a
tax neutralization payment is particularly appropriate because the breaching party is the federal
government. Without the award of a tax gross-up payment, the government would benefit twice
from its breach: first–in its proprietary capacity as a contracting party–by requiring plaintiff to
continue to provide low- and moderate-income housing when plaintiff was not contractually
required to do so, and then–in its role as a tax collector–from collecting more tax payments than
it would have collected absent its breach. The government should not be enriched from
breaching its contracts. Accord AmBase Corp. v. United States, 100 Fed. Cl. 548, 578 (2011)
(“[T]he Government as breaching party should not benefit from its breach.”); see also Citizens
Fin. Servs., FSB v. United States, 64 Fed. Cl. 498, 502 (2005) (“When the government breaches
a contract, the law requires the government, like any private party, to compensate an injured party
for any harm that it has caused.”), aff’d, 170 F. App’x 129 (Fed. Cir. 2006) (mem.).

        Defendant’s objections to permitting the type of tax neutralization payment requested by
plaintiff are not persuasive. Defendant first contends that allowing for such a payment would
“swallow the rule” articulated in Carabetta Enterprises “that a tax gross-up is not available on
damages compensating for taxable losses,” Reply 5, because “[i]n any case–except the extremely


       9
          Plaintiffs must also establish, as with any other damages claim, that the increased tax
burden was “reasonably foreseeable by the breaching party at the time of contracting” and that
“the breach [was] a substantial causal factor in the” the increased tax burden. Ind. Mich. Power
Co. v. United States, 422 F.3d 1369, 1373 (Fed. Cir. 2005). Such a showing must be made by a
preponderance of evidence. SUFI Network Servs., Inc. v. United States, 755 F.3d 1305, 1312
(Fed. Cir. 2014).

                                               -15-
rare instance where judgment is entered in the same tax year as the loss–the tax rate in the year of
the judgment will inevitably be different from the tax rate in the year of the loss,” id. at 6. As a
result, defendant asserts, a court would be required to determine and account for “the marginal
tax differences” in every case where a plaintiff seeks damages based on taxable income. Id.
However, the fact that, in most cases, “the tax rate in the year of the judgment will inevitably be
different from the tax rate in the year of the loss,” id., does not mean that plaintiffs will always
seek a tax gross-up payment to account for the tax consequences of a damages award. A plaintiff
might determine, based on its individual circumstances, that the receipt of a lump-sum damages
award would decrease, rather than increase, its overall tax burden. Or, a plaintiff might conclude
that the tax consequences of a lump-sum damages award would be negligible. If a plaintiff does
not assert a tax gross-up claim, then the court would have no occasion to consider the tax
consequences of a damages award. It also bears emphasizing that the award of a tax gross-up
payment is not automatic even if requested because a plaintiff must prove all elements of its
damages claim by a preponderance of the evidence.

        Defendant next contends that disallowing plaintiff’s claim for a tax neutralization
payment is consistent with the decision of the United States Supreme Court (“Supreme Court”)
in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968). In Hanover Shoe,
the defendant, a manufacturer and distributor of shoe machinery, was found to be engaged in the
monopolistic “practice of leasing and refusing to sell its more complicated and important shoe
machinery . . . .” Id. at 483. The plaintiff, a shoe manufacturer, established that it “would have
bought rather than leased” shoe machinery from the defendant “had it been given the opportunity
to do so,” and that the cost of purchasing the shoe machinery would have been less than the cost
of renting it. Id. at 487. The district court awarded the plaintiff damages to compensate for the
cost difference. Id. On appeal, the Third Circuit concluded “that since only after-tax profits can
be reinvested or distributed to shareholders, [the plaintiff] was damaged only to the extent of the
after-tax profits that it failed to receive.” Id. at 503. It therefore remanded the damages award to
the district court “to take account of the additional taxes [the plaintiff] would have paid[] had it
purchased machines instead of renting them during the years in question.” Id. at 502.

        The Supreme Court disagreed with the Third Circuit’s conclusion. Id. at 503. It
explained that the plaintiff’s damages award was taxable income, and that reducing the award
“by the amount of the taxes that [the plaintiff] would have paid had it received greater profits in
the years it was damaged would be to apply a double deduction for taxation, leaving [the
plaintiff] with less income than it would have had” absent its injury. Id. The Supreme Court
then acknowledged “that accounting for taxes in the year when damages are received rather than
the year when profits were lost can change the amount of taxes” collected by the Internal
Revenue Service. Id. It noted, however, that

       because the statute of limitations frequently will bar the [Internal Revenue
       Service] from recomputing for earlier years, and because of the policy underlying
       the statute of limitations–the fact that such recomputations are immensely difficult
       or impossible when a long period has intervened–the rough result of not taking


                                                -16-
        account of taxes for the year of injury but then taxing recovery when received
        seems the most satisfactory outcome.

Id.

        According to defendant, Hanover Shoe counsels against accounting “for the difference in
the tax rates between the years when the losses occurred and the years when damages [are] paid.”
Reply 7. Defendant reads Hanover Shoe too broadly. The Supreme Court’s primary concern in
Hanover Shoe was ensuring that the plaintiff was not subjected to double taxation by having
income taxes subtracted from the lost profits that constituted its damages and then being required
to pay taxes on the damages award. Cf. Kalman v. Berlyn Corp., 914 F.2d 1473, 1483 (Fed. Cir.
1990) (noting that the “Hanover Shoe rule”–that taxes should not be deducted from lost profit
damages–“has been followed in patent infringement cases”). Its comments regarding the tax rate
differential were relevant only to its discussion concerning when the plaintiff’s lost income
should be subject to taxation (time of injury versus time of damages award). In this case, there is
no dispute that plaintiff would be taxed on its lost income when it receives a damages award.
Rather, plaintiff is challenging the amount of taxes that it should be required to pay on any such
lost income. Hanover Shoe does not preclude the court from addressing that challenge.

         Finally, defendant contends that if the court allows the type of tax gross-up claim asserted
by plaintiff, it would make a plaintiff’s income tax returns relevant, and therefore discoverable,
“in nearly every case.” Reply 8. As the court noted above, however, not every plaintiff will
want, or need, to assert a tax gross-up claim. Thus, it is mere speculation to contend that income
tax returns would be relevant in every case. Moreover, the fact that allowing a new claim might
result in additional discovery is no reason to preclude a plaintiff from bringing that claim in the
first instance.

        In sum, the court declines to apply the holding in Carabetta Enterprises in this case
because the facts of the two cases are distinguishable. Any damages award should make plaintiff
whole and plaintiff cannot be made whole if it is denied the opportunity to present evidence that
the government’s breach of contract will cause it to sustain an increased tax burden. Indeed, if
plaintiff was denied the opportunity to present such evidence, the government might end up
benefitting twice from its breach–first by retaining low- and moderate-income housing, and then
by collecting a greater amount of income tax. The court will not condone additional harm to
plaintiff, so long as plaintiff can prove the amount of the tax neutralization payment to which it is
entitled by a preponderance of the evidence. Ultimately, plaintiff should receive an amount of
damages that puts it in the same economic position it would have been in had the government not
breached the contract.

                                        III. CONCLUSION

         As set forth above, the court concludes that plaintiff is entitled to attempt to prove, at
trial, that a lump-sum damages award would increase its overall tax liability beyond what it


                                                 -17-
would have been had it received market rate rental income from the date that it sought to prepay
the balance of its loan. Accordingly, the court DENIES defendant’s motion for partial summary
judgment as to the propriety of plaintiff’s claim for a tax neutralization payment.

       IT IS SO ORDERED.

                                                     s/ Margaret M. Sweeney
                                                     MARGARET M. SWEENEY
                                                     Judge




                                              -18-
