Unreported / Non-Citable
Background
Anthony Levandowski worked at Google beginning in 2007 and in 2015 co-founded Ottomotto LLC, which Uber acquired in August 2016. In connection with the sale, Uber agreed to indemnify a group of Otto employees, including Levandowski, for certain claims Google could bring, such as breach of fiduciary duty, non-solicitation, non-competition, and confidentiality obligations. Google won an arbitration award of about $179 million against Levandowski, which a California Superior Court confirmed on March 4, 2020. He filed for Chapter 11 the same day and later sued Uber to enforce the indemnification agreement.
After a January 2022 mediation, Levandowski, Uber, and Google settled. Uber agreed to make an indefeasible payment directly to Google, called the Uber Main Payment or UMP, and to pay $2 million to the estate for plan distributions, with mutual releases covering all claims connected to the indemnification agreement. The bankruptcy court approved the settlement and determined tax consequences under 11 U.S.C. § 505. After a prior reversal and limited remand, its January 24, 2024 Tax Order held the UMP was gross income and rejected four exclusion theories: an insurance analogy, the tax benefit rule, a working condition fringe, and a deductible reimbursement of services. Levandowski and the trustee, Peter Kravitz, appealed together, and the IRS and the California Franchise Tax Board defended the order.
The Court’s Holding
Because the Tax Order rested on legal conclusions this court directed on remand rather than new fact findings, the district court reviewed it de novo. It first affirmed the rejection of the insurance analogy. The record showed the payment arose from a negotiated multiparty settlement, not the indemnification agreement specifically. Even under the AMERCO factors the analogy failed. The indemnity covered negotiated business risks of the Otto acquisition, not insurable hazards. Uber assumed a single concentrated risk rather than pooled risks. Uber was not an insurer, no premiums were paid, and enforceability was contested. Exclusions are also narrowly construed.
The court also affirmed that the UMP was gross income. Citing the broad scope of Section 61(a) and the Ninth Circuit principle that when C pays A's debt to B, the payment is income to A, it held appellants' complete dominion argument irrelevant, because Uber paid Google part of the arbitration award Levandowski owed. It found that the bankruptcy court had characterized the payment as discharge-of-indebtedness income under Section 61(a)(11). It rejected the California Franchise Tax Board's suggestion that the specific provision need not be decided, and it concluded that a third party's payment that cancels a debt can be such income.
The court reversed on Section 108(a), which the bankruptcy court had not considered. That section excludes discharge-of-indebtedness income when the discharge occurs in a Title 11 case, including under a court-approved plan. The Board argued the payment was really compensation for services because the indemnity arose during employment and sale negotiations. The court applied the same reasoning it used on the insurance issue: the settlement agreement controlled, and it resolved claims beyond the indemnity claim, including Google's claims against Uber. Because the payment was made in the Chapter 11 case under a court-approved plan, it was excludable. The court reversed and remanded for proceedings consistent with its order without specifying further steps, and it did not separately address the tax benefit rule, working condition fringe, or reimbursement theories.
Key Takeaways
- A third party's payment that satisfies part of a taxpayer's debt can be gross income to the taxpayer as discharge of indebtedness under Section 61(a)(11), even if the taxpayer lacked complete dominion over the funds.
- An acquisition-related indemnity covering negotiated business risks, with no premiums and no risk pooling, did not qualify as insurance under the AMERCO factors.
- For tax analysis, the court treated the settlement agreement, not the underlying indemnification agreement, as controlling when the settlement resolved broader claims.
- Section 108(a) excluded the payment because it was made in the Chapter 11 case under a court-approved plan, so characterizing the payment as income did not end the inquiry.
Why It Matters
The order shows how Section 61(a)(11) and Section 108(a) interact when a third party pays a bankruptcy debtor's judgment debt through a court-approved global settlement. Taxing authorities cannot rely on a compensation-for-services theory tied to the original indemnity when the approved settlement resolved broader claims.
This is a single district court order on appeal from bankruptcy. It is unpublished and not binding precedent, and it leaves open the remanded proceedings and the other exclusion theories the court did not separately address. It nonetheless offers useful guidance for structuring and tax-analyzing bankruptcy settlements funded by third parties.