FMC Corp. v. Comm'r

T.C. Memo. 2001-298

UNITED STATES TAX COURT

FMC CORPORATION AND SUBSIDIARIES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2317-00. Filed November 8, 2001.

P paid the investment banking firm of Goldman,

Sachs & Co. (G) approximately $17.5 million to advise

it financially on a recapitalization. One of G’s

employees disclosed non-public information on the

recapitalization to various Wall Street professionals,

including IB. IB traded P’s stock on the basis of this

non-public information. P first announced that it

would redeem each share of P stock held by the public

in exchange for cash of $70 and one share of stock in

the new company. P later increased the cash payment to

$80 per share and effectuated the recapitalization at

that price. P’s cash payment under the revised plan,

less the cash payment which it would have made under

the original plan, equaled $217,649,340. Subsequently,

P sued G, IB, and others in a Federal District Court in

Illinois alleging, among other things, that they were

responsible for the increased cash payment. The

District Court dismissed the complaint in full but the

Court of Appeals for the Seventh Circuit reversed.

Upon remand, the district court dismissed the complaint

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for failure to state a claim, but only in part. After

the case was transferred to a Federal District Court in

New York, all of the defendants, except G, settled.

The court later granted G’s motion for summary judgment

and the Court of Appeals for the Second Circuit upheld

the judgments by both District Courts. P claimed a

$217,649,340 theft loss deduction on its 1994 Federal

income tax return.

Held: P is collaterally estopped from claiming

that it sustained a theft loss by virtue of the

additional cash payment of $217,649,340. The

disposition of the prior action in G’s favor rested on

findings that P redeemed its stock for no more than it

was worth and thus sustained no cognizable injury from

the disclosure of the confidential information.

F. Brook Voght and David B. Blair, for petitioner.

Lawrence C. Letkewicz, for respondent.

MEMORANDUM OPINION

LARO, Judge: Petitioner petitioned the Court to redetermine

respondent’s determination of a $2,030,589 deficiency in its 1994

Federal income tax. Petitioner’s sole assignment of error

concerns respondent’s disallowance of a $217,649,340 theft loss

deduction claimed for that year. Petitioner alleged in its

petition that the theft loss related to the fraudulent and

illegal activities of Ivan F. Boesky (Boesky), which caused

petitioner to redeem its stock (old FMC stock) at an artificially

increased price.

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Respondent moves the Court to adjudicate this case summarily

under Rule 121,1 asserting that petitioner is collaterally

estopped from proving that it is entitled to such a loss.

Respondent bases his motion on the pleadings and the parties’

stipulation of facts and accompanying exhibits. Respondent

supports his motion with a memorandum of law.

Petitioner objects to respondent’s motion. Petitioner

asserts that collateral estoppel does not apply in this case.

Petitioner embodied its objection in a brief that it filed with

the Court in response to respondent’s motion.

We agree with respondent that petitioner is collaterally

estopped from claiming the referenced theft loss. We set forth

our reasoning below.

Background

The parties have stipulated facts and exhibits for purposes

of this case. We have derived most of the facts set forth in

this background section from that stipulation of facts and those

accompanying exhibits. We have derived the remaining facts from

the pleadings. See Rule 36(c).

Petitioner is a Delaware corporation whose principal place

of business was in Chicago, Illinois, when its petition was

filed. From January through June 1984, its stock (the old FMC

1

Unless otherwise indicated, Rule references are to the Tax

Court Rules of Practice and Procedure.

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stock) traded at between $41 7/8 and $48 5/8 per share. In

August 1984, following its redemption of 8.3 million shares

(approximately 25 percent) of old FMC stock at an average price

of approximately $54 per share, old FMC stock traded at

approximately $60 per share.

In early 1985, petitioner retained the investment banking

firm of Goldman, Sachs & Co. (Goldman) to advise it financially

on a possible corporate restructuring. Goldman implemented its

normal procedures for maintaining the confidentiality of

information relating to petitioner, including assigning

petitioner’s project with a code name. Petitioner agreed to pay

Goldman a fee of approximately $17.5 million upon consummation of

any restructuring.

David S. Brown (Brown) was a Goldman employee who was not

assigned to petitioner’s project. Unbeknownst to Goldman, Brown

had been providing non-public information on pending transactions

to a number of individuals, including Boesky, Ira Sokolow

(Sokolow) of Shearson Lehman Bros., Inc. (Shearson), and Dennis

Levine (Levine) of Drexel Burnham Lambert (Drexel). While

working for Goldman, Brown learned that petitioner was

considering a major transaction and passed on that information to

Sokolow. Sokolow passed on the information to Levine, and Levine

passed on the information to Boesky.

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From February 18 through 21, 1986, Boesky and his affiliated

entities purchased 105,300 shares of old FMC common stock,

accounting for approximately 15 percent of the stock’s trading

volume during that period. The stock opened at $71 3/4 per share

on February 18, 1986, and it traded at a high of $82 per share on

the morning of February 21, 1986. During that morning,

petitioner asked the New York Stock Exchange to suspend trading

of its stock and announced that it was considering a

recapitalization.

The next day, petitioner announced that its board of

directors (board) had approved a plan of recapitalization (first

plan) under which it would purchase: (1) Each share of old FMC

stock held by its management for 5.667 shares of common stock

(new FMC stock) in the recapitalized company, (2) each share of

old FMC stock held by its thrift plan for four shares of new FMC

stock and $25 cash, and (3) each share of old FMC stock held by

public shareholders for one share of new FMC stock and $70 cash.

Pursuant to the first plan, petitioner would purchase

approximately 20 percent of its ownership from public

shareholders. Goldman had opined as to those shareholders that

they would receive under the first plan fair consideration for

their shares.2 Goldman believed that each share of new FMC stock

2

Morgan Stanley & Co. (Morgan Stanley) also rendered a

similar opinion.

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was worth $15 and that each holder of old FMC stock would receive

consideration of $85 per share. Old FMC stock reopened for

trading on February 24, 1986, and it closed that day at $87 1/2.

During the week of February 24, 1986, holders of old FMC

stock filed three purported class action lawsuits against

petitioner and each of its directors in the Court of Chancery of

the State of Delaware. The complaints alleged, among other

things, that the first plan permitted petitioner's management and

employees to increase their ownership of the company at a low and

unfair price.

From March 3 through April 4, 1986, Boesky and various

entities controlled by him purchased 1,922,000 shares of old FMC

stock, nearly 35 percent of the stock's trading volume during

that period. On April 7, 1986, Boesky filed a Schedule 13D with

the Securities and Exchange Commission (SEC) disclosing these

purchases.

By mid-April, old FMC stock was trading in the range of $95

to $97 per share. During the week of April 21, 1986, Goldman

advised petitioner that, due to the increase in the price of old

FMC stock, Goldman would withdraw its fairness opinion unless

petitioner either increased the cash paid to public shareholders

or decreased the number of shares of new FMC stock paid to

management and the thrift plan. Petitioner did not consider

reducing the number of shares of new FMC stock paid to management

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and the thrift plan as a viable option because, among other

things, petitioner wanted the recapitalization to effect a

20-percent shift in ownership so that the public shareholders

could treat their cash distributions as capital gains rather than

as dividends.

Due to the increased trading price for old FMC stock, and on

the advice of Goldman, Morgan Stanley, Morgan Guaranty Trust

Company (Morgan Guaranty), and outside counsel, petitioner's

board approved on April 26, 1986, a revised plan of

recapitalization (revised plan) which increased the cash payment

to public shareholders to $80 per share. Goldman now believed

that each share of new FMC stock was worth $17.14 (instead of

$15) and that each holder of old FMC stock would receive the

equivalent of $97.14. Petitioner announced the revised plan on

April 28, 1986. Approximately 2 days before, the plaintiffs in

the purported class action lawsuits agreed to resolve their

claims subject to, among other things, payment to them of $1

million and the revision of the first plan.

Both Goldman and Morgan Stanley opined to petitioner's

board, by letters dated April 26, 1986, and April 27, 1986,

respectively, that the consideration to be received by public

shareholders under the revised plan was fair. The revised plan

was approved by petitioner's shareholders at the annual meeting

held on May 22, 1986, and petitioner completed the

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recapitalization 6 days later. Public shareholders received $80

cash and one share of new FMC stock for each share of old FMC

stock. The cash payment made by petitioner under the revised

plan, less the cash payment which it would have made under the

first plan, equaled $217,649,340 (21,764,934 shares multiplied by

the $10 difference between $80 and $70).

Petitioner had obtained preliminary financing for the first

plan with a consortium of banks, led by Morgan Guaranty. With

the additional $217,649,340 in cash required for the revised

plan, the banks revised the terms of the loans to impose

restrictive covenants on petitioner and refused to fund the

additional cash payment, so that petitioner had to raise the

funds through a senior subordinated debt offering. The change in

financing also led the rating agencies to downgrade petitioner’s

debt.

On November 14, 1986, the SEC filed a Complaint for

Injunctive and Other Equitable Relief against Boesky in the

U.S. District Court for the Southern District of New York. The

complaint alleged that Boesky was part of a trading scheme in

which Brown, Sokolow, Levine, and others gathered material non-

public information on pending business combinations or other

extraordinary transactions. The complaint alleged that Levine

conveyed this information to Boesky, who traded on the basis of

the information knowing, or recklessly disregarding, that the

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information had been obtained in breach of fiduciary obligations

to keep the information confidential. The complaint alleged

that, on the basis of material non-public information that Boesky

had obtained through this trading scheme, Boesky had traded in

the securities of certain companies, including, from February 18

to 21, 1986, petitioner. Boesky settled this complaint, agreeing

to pay a $50 million fine, to disgorge another $50 million in

profits from his illegal activities, to refrain from further

violations of the securities laws, and to cooperate in a Federal

investigation into his and others’ illegal activities.

In December 1986, petitioner filed a 16-count complaint

(Complaint) in U.S. District Court for the Northern District of

Illinois against Boesky, Brown, Levine, Sokolow, Goldman, Drexel,

and Shearson (collectively, defendants). Counts I through V

alleged violations of Federal securities laws. Counts VI through

VIII alleged violations of the Racketeer Influenced and Corrupt

Organizations Act (RICO), 18 U.S.C. sections 1961 and 1964(c).

Counts IX through XVI alleged violations of common law. All

sixteen counts alleged that petitioner had suffered damages in

excess of $235 million. Paragraph 64 of the Complaint alleged as

"Adverse Financial Consequences to FMC":

As a direct and proximate result of the

illegal conduct alleged herein, FMC paid

approximately $220 million more for the

publicly held common stock of FMC tendered in

response to FMC's purchase offer than FMC

would have paid absent the illegal conduct.

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The District Court (Judge Ann C. Williams, presiding)

dismissed the Federal claims set forth in the Complaint, holding

that petitioner lacked the requisite constitutional standing to

sue, and refused to exercise pendant jurisdiction over the State

law claims. FMC Corp. v. Boesky, 673 F. Supp. 242 (N.D. Ill.

1987). The Court of Appeals for the Seventh Circuit reversed,

holding that petitioner had the requisite standing to sue in

Federal court by virtue of the wrongful misappropriation of its

confidential business information and the use of that information

to further insider trading. FMC Corp. v. Boesky, 852 F.2d 981

(7th Cir. 1988). Subsequently, on or about September 23, 1988,

petitioner filed a first amended complaint (First Amended

Complaint) containing 16 counts, all of which alleged again that

petitioner suffered damages in excess of $235 million. Paragraph

64(b) of the First Amended Complaint alleged as "Adverse

Financial Consequences to FMC" that

The price of FMC's common stock was

wrongfully manipulated, causing FMC to revise

its planned recapitalization and pay

approximately $220 million more in cash than

FMC would have paid for its publicly held

common stock, tendered in response to FMC's

offer to purchase Old FMC Stock and to sell

New FMC Stock; * * *

Upon remand, the District Court dismissed, with prejudice,

for failure to state a claim, petitioner's claims under the

securities laws, holding that petitioner had failed to establish

that it suffered any actual economic damages from the defendants’

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use of insider information. FMC Corp. v. Boesky, 727 F. Supp.

1182 (N.D. Ill. 1989). The court also dismissed, without

prejudice, Goldman, Shearson, and Drexel from two of the three

RICO counts. The court denied the defendants' motion to dismiss

the remaining claims, all of which were made against the

individual defendants and the Boesky entities, or concerned

petitioner’s pendant State law claims. Id. at 1185, 1201.

On April 11, 1990, the Judicial Panel on Multi-District

Litigation transferred the case of FMC Corp. v. Boesky, supra, to

Senior District Judge Milton Pollack (Judge Pollack) of the

U.S. District Court for the Southern District of New York to

coordinate or consolidate pretrial proceedings in In re Ivan F.

Boesky Sec. Litig., MDL No. 732. All of the defendants, except

for Goldman, ultimately settled with petitioner. Boesky and his

entity, CX Partners, agreed to pay petitioner $3 million plus

interest from amounts that CX Partners received from Boesky’s

disgorgement fund, and Shearson agreed to pay petitioner

$540,000. Brown, Levine, Sokolow, and the other defendants were

insolvent, but agreed to cooperate with petitioner. On

December 10, 1992, upon motion by the SEC, the U.S. District

Court for the Southern District of New York approved payment of

$6,742,685 from Boesky’s disgorgement fund to CX Partners, of

which $3 million plus interest was to be paid to petitioner in

satisfaction of the settlement agreement. On December 30, 1996,

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the U.S. District Court for the Southern District of New York

approved a plan of distribution from Boesky’s disgorgement fund

to persons who sold old FMC stock from February 18 through April

4, 1986.

On or about August 5, 1992, petitioner filed a second

amended complaint (Second Amended Complaint). The Second Amended

Complaint generally contains the same 16 counts as the Complaint

and the First Amended Complaint, plus an additional common law

count. The Second Amended Complaint notes that petitioner's

securities law counts and its allegation that petitioner

sustained damages in excess of $235 million had been dismissed

but were alleged again to preserve petitioner's rights to seek

reconsideration of that dismissal and to appeal. Paragraph 94(b)

of the Second Amended Complaint alleges as "Adverse Financial

Consequences to FMC" that

The price of FMC's common stock was

wrongfully manipulated, causing FMC to revise

its initial recapitalization plan and pay

approximately $220 million more in cash than

FMC would have paid for its publicly held

common stock, tendered in response to FMC's

offer to purchase Old FMC Stock and to sell

New FMC Stock * * *

Subsequently, at the direction of Judge Pollack, petitioner filed

a revised Second Amended Complaint, omitting claims that had

previously been dismissed or settled.

On September 11, 1992, Goldman moved for summary judgment on

all of petitioner's remaining claims. For the limited purpose of

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that motion, Goldman agreed that it had a contractual, fiduciary,

or other duty to petitioner to keep information relating to its

restructuring plan confidential and that this duty had been

breached. After a 3-day evidentiary hearing, held under Rule

43(e) of the Federal Rules of Civil Procedure, the court granted

Goldman's motion for summary judgment on the remaining claims

against Goldman. See FMC Corp. v. Boesky, 825 F. Supp. 623

(S.D.N.Y. 1993). Upon appeal, the Court of Appeals for the

Second Circuit upheld the judgments of the U.S. District Courts

for the Northern District of Illinois and the Southern District

of New York. See FMC Corp. v. Boesky, 36 F.3d 255 (2d Cir.

1994). That judgment became final during 1994.

On its 1994 Federal income tax return, petitioner claimed a

theft loss deduction of $217,649,340. Respondent disallowed this

deduction in full.

Discussion

We must decide whether petitioner is collaterally estopped

from proving that it is entitled to deduct the claimed theft

loss. Respondent moves the Court to decide this issue summarily,

asserting that collateral estoppel prevents petitioner from

deducting such a loss. Petitioner objects to respondent’s

motion. Petitioner asserts that two elements of collateral

estoppel have not been met. First, petitioner argues, the

factual and legal issues presented here are different from the

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issues presented in petitioner’s prior case against Goldman.

Second, petitioner argues, the issue of whether it suffered a

theft loss on account of the insider trading of Boesky and his

co-conspirators (collectively, Boesky) was not actually litigated

in the prior case because, petitioner contends, the issue was not

necessary to a holding there.

Summary judgment is intended to expedite litigation and to

avoid unnecessary and expensive trials of phantom factual issues.

P & X Mkts., Inc. v. Commissioner, 106 T.C. 441, 443 (1996),

affd. without published opinion 139 F.3d 907 (9th Cir. 1998);

Boyd Gaming Corp. v. Commissioner, 106 T.C. 343, 347 (1996).

The concept of summary judgment is specifically recognized by

this Court and is deeply ingrained in our procedural rules.

See Rule 121(a) (“Either party may move, with or without

supporting affidavits, for a summary adjudication in the moving

party’s favor upon all or any part of the legal issues in

controversy”). A decision on the merits of a taxpayer's claim

can be made through summary judgment "if the pleadings, answers

to interrogatories, depositions, admissions, and any other

acceptable materials, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law." Rule 121(b); see

also Zaentz v. Commissioner, 90 T.C. 753, 754 (1988). Because

summary judgment decides against a party before trial, we grant

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such a remedy cautiously and sparingly, and only after carefully

ascertaining that the requirements for summary judgment have been

met. P & X Mkts., Inc. v. Commissioner, supra at 443; Boyd

Gaming Corp. v. Commissioner, supra at 346-347. Among the

principles relevant to summary judgment are: (1) The moving

party must show the absence of any material fact in dispute and

that it is entitled to judgment as a matter of law; (2) the

factual materials and resulting inferences must be viewed in the

light most favorable to the opposing party; and (3) the opposing

party must set forth specific facts to show a genuine issue of

material fact for trial and cannot rest upon mere allegations or

denials. Brotman v. Commissioner, 105 T.C. 141, 142 (1995).

Collateral estoppel may apply in Federal tax cases,

Commissioner v. Sunnen, 333 U.S. 591, 598 (1948), and summary

judgment may be used to establish matters covered by collateral

estoppel, Brotman v. Commissioner, supra at 142. If collateral

estoppel applies, issues which were litigated and decided in an

earlier case on one cause of action may not be relitigated by the

parties or their privies on a different cause of action. Montana

v. United States, 440 U.S. 147, 153 (1979); Parklane Hosiery Co.

v. Shore, 439 U.S. 322, 326 n.5 (1979); Commissioner v. Sunnen,

supra at 597. Collateral estoppel conserves judicial resources

and fosters reliance on judicial action by minimizing the

possibility of inconsistent decisions. Montana v. United States,

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supra at 153-154; Meier v. Commissioner, 91 T.C. 273, 282-284

(1988).

Collateral estoppel applies when six conditions are met.

First, the issue in the later case must be identical in all

respects to the issue decided in the prior case. Commissioner v.

Sunnen, supra at 599-600; Peck v. Commissioner, 90 T.C. 162,

166-167 (1988), affd. 904 F.2d 525 (9th Cir. 1990). Second, a

final judgment must have been rendered in the prior case by a

court of competent jurisdiction. Peck v. Commissioner, supra at

166; Gammill v. Commissioner, 62 T.C. 607, 613 (1974). Third,

collateral estoppel must be asserted in the later case against a

party to the prior case or against a privy to that party. Peck

v. Commissioner, supra at 166-167; Gammill v. Commissioner, supra

at 614-615; see also Parklane Hosiery Co. v. Shore, supra

(mutuality of parties is not necessary for collateral estoppel).

Fourth, the issue in the later case must be one that the parties

to the prior case actually litigated and that was essential to

the prior decision. Commissioner v. Sunnen, supra at 598, 601;

Peck v. Commissioner, supra at 166-167. Fifth, the controlling

facts and legal principles must remain unchanged from the prior

litigation. Commissioner v. Sunnen, supra at 599-600; Peck v.

Commissioner, supra at 166-167. Sixth, no special circumstances

exist that would warrant the trial court in the later case to

exercise its discretion to find an exception to the normal rules

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of preclusion. Montana v. United States, supra at 162; Meier v.

Commissioner, supra at 291-292.

Petitioner acknowledges that the satisfaction of these six

conditions would lead to the application of collateral estoppel.

Petitioner focuses solely on the first and fourth elements,

arguing that these two elements have not been met. Petitioner

argues that: (1) The factual and legal issues here are different

than those issues in its case against Goldman, and (2) the issue

of whether it suffered a theft loss on account of Boesky’s

insider trading was not actually litigated in the prior case

because, it contends, that issue was not necessary to a holding

there. We address these two elements seriatim and then turn to

the sixth element concerning our discretion to find an exception

for special circumstances.

1. Similarity of Issues

Petitioner argues that the factual and legal issues here are

fundamentally different from those in its prior case. Petitioner

asserts that the cases are different factually in that the prior

case decided only its limited claims against Goldman, whereas the

current case centers on the actions of Boesky in the context of a

Federal income tax deduction. Moreover, petitioner asserts, the

cases are factually different in that the prior case did not

concern the current issue of whether the value of old FMC stock

was artificially inflated by Boesky’s illegal actions. As to the

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difference in legal issues, petitioner asserts, the prior

decision rested primarily on the legal conclusion that petitioner

and its shareholders were a single economic unit. Petitioner

asserts that a corporation and its shareholders are not a single

economic unit for purposes of this case.

We reject petitioner’s argument that the issue at hand was

not at issue in its prior case. Although we agree with

petitioner that its theft loss deduction for Federal income tax

purposes was not at issue there, the focus of collateral estoppel

is set appropriately on the identity of issues and not on the

identity of legal proceedings. Collateral estoppel may apply to

an issue of fact (or law) that was litigated in a prior action

even though that litigation related to a claim that is absent

from the current case. Brotman v. Commissioner, 105 T.C. at 148;

Bertoli v. Commissioner, 103 T.C. 501, 508 (1994).

Our decision as to the validity of petitioner’s claimed

theft loss deduction requires that we find the value of the old

FMC stock at the time of petitioner’s recapitalization. See sec.

1.165-8(c), Income Tax Regs. The courts in petitioner’s prior

case against Goldman also had to make that factual determination

in order for them to decide petitioner’s claim for damages.

Contrary to petitioner’s assertion, the fact that the courts in

the prior case did not decide a specific claim against Boesky

does not prevent this Court from applying collateral estoppel to

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the facts at hand. Our application of collateral estoppel is

driven by the critical fact that the other courts had before them

the value of the old FMC stock at the time of petitioner’s

recapitalization and that we have the same issue here.

Our conclusion that the value of the old FMC stock was and

is at issue in the respective cases is supported by our reading

of the relevant allegations in petitioner’s pleadings in the

respective cases. Petitioner’s current allegations as to the

theft loss are in all material respects the same as its

corresponding prior allegations as to damages. The petition

alleges as to the claimed theft loss that: (1) Boesky obtained

confidential information about its recapitalization and made a

series of large, illegal trades in old FMC stock, (2) “Boesky's

illegal activities manipulated the price of FMC shares by

artificially increasing it through market misinformation,"

including the filing of a false Schedule 13D, and (3) "the

increased share price damaged FMC by fraudulently causing

management to revise the recapitalization plan and pay out

$217,649,340 of additional cash." The petition alleges further

that Boesky's illegal conduct artificially inflated the price of

old FMC stock, causing petitioner to revise the first plan and to

pay to its shareholders $217,649,340 more than it had originally

planned.

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The prior pleadings, in turn, allege as to damages that:

(1) The conduct of Boesky, Goldman, and others in connection with

the recapitalization violated both securities law and RICO;

(2) Boesky defrauded petitioner; (3) Boesky induced or

participated in a breach of fiduciary duty by Goldman; (4) Boesky

wrongfully interfered with petitioner's contractual relationship

with Goldman; and (5) Boesky, together with Goldman,

misappropriated petitioner's business and proprietary information

and wrongfully interfered with its prospective economic

relationship with its shareholders.3 The First Amended Complaint

alleges (and the other prior pleadings allege similarly) that

petitioner’s damages resulting from the illegal conduct of the

defendants include that

The price of FMC's common stock was wrongfully

manipulated, causing FMC to revise its planned

recapitalization and pay approximately $220 million

more in cash than FMC would have paid for its publicly

held common stock, tendered in response to FMC's offer

to purchase Old FMC Stock and to sell new FMC stock;

* * *

Each count of the prior pleadings, with the exception of one

count in the Second Amended Complaint, alleges that petitioner’s

damages exceeded $235 million. This amount corresponds to the

claimed theft loss in that it approximates the sum of the

3

The prior pleadings also allege fraudulent inducement,

negligence, breach of fiduciary duty, and breach of contract by

Goldman.

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$217,649,340 additional cash payment (the claimed theft loss) and

Goldman’s $17.5 million fee.

We conclude that the issue here as to value is the same as

in the prior case. Accordingly, we hold that this element of

collateral estoppel is present in the instant case.

2. Issue Actually Litigated and Essential to Prior Decision

Petitioner asserts that the issue of whether it suffered a

theft loss on account of Boesky’s insider trading was not

actually litigated in the prior case because, petitioner

contends, it was not necessary to a holding there. Petitioner

recognizes that: (1) Judge Pollack stated that petitioner had

presented no evidence that the value of the old FMC shares was

less than the $97 that it ultimately paid for those shares and

(2) the Court of Appeals for the Second Circuit made similar

statements as to that value. Petitioner discredits the courts’

statements on the value of old FMC stock as dicta.

We disagree with petitioner that the courts’ statements on

value are dicta. First, as to the District Court, Judge

Pollack’s discussion of value was necessary to his holding there,

it “received the full and careful consideration of the court that

uttered it”, and it “could [not] have been deleted without

seriously impairing the analytical foundations of the holding”.

Sarnoff v. Am. Home Prods. Corp. 798 F.2d 1075, 1084 (7th Cir.

1986) (“A dictum is a statement in a judicial opinion that could

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have been deleted without seriously impairing the analytical

foundations of the holding--that, being peripheral, may not have

received the full and careful consideration of the court that

uttered it.”). In deciding petitioner’s claims in that case, the

court observed initially that petitioner had before the court two

theories for the recovery of damages, one of which was for the

loss of the value of confidential information. FMC Corp. v.

Boesky, 825 F. Supp. 623, 632 (S.D.N.Y. 1993). As to that

theory, the court stated:

the question here is what legally compensable value did

FMC hold on behalf of its shareholders in keeping

confidential prior to those dates information relevant

to its planned restructure of the interests of its

public and management shareholders in the corporate

equity that was compromised by the alleged premature

disclosure caused by Goldman Sachs' employees, and what

is the best legal measure of that diminution in value

of the information or plan as demonstrated by specific

facts presented to the Court? [Id. at 633.]

In deciding that question, the court first noted:

The exclusive use of the only information shown to

have been leaked, that a possible recapitalization was

in the works, unintentionally inured to the

benefit--not the detriment--of the public shareholders,

and the insiders commensurably shared the benefit of

the rise and assertion of a stock price expressing the

value of the equity. As elaborated below, FMC has

failed to adduce any admissible evidence of specific

facts that FMC sustained any increase in costs to it

incurred to effectuate the restructure, or that any

legitimate and legally cognizable value held by FMC in

the financial information, which benefitted all its

shareholders (at no cost to the company), was

diminished in any way by premature disclosure.

Correspondingly, the best measure of the compensable

cost incurred by FMC or diminution in value of its plan

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is zero. FMC has thus failed to meet its evidentiary

burden of adducing specific facts to evidence

cognizable injury or damage to its shareholders or

itself assertable against Goldman Sachs. [Id.]

The court then concluded:

A careful consideration of the full record before

the Court in the light most favorable to FMC plainly

shows that: FMC failed to adduce admissible evidence

of specific facts showing that * * * the price paid by

FMC to its own shareholders for the restructure was

anything other than a fair price established by the

open market; [Id.]

The court reasoned:

An understanding of the essential economic nature

of FMC's recapitalization transaction is crucial to the

proper resolution of the issues before the Court. In

essence, the transaction was intended to increase the

proportion of FMC's equity held by management and to

correspondingly decrease that proportion held by public

shareholders. This would be achieved by returning to

public shareholders, through cash payments, a fraction

of their equity investment in FMC while leaving intact

and unchanged management's equity investment, the

result being, of course, that management would end up

with a larger proportionate share of the reduced total

equity investment in FMC.

The transaction would be fair to all parties if

and only if the public shareholders received in cash

the fair value of the equity they were asked to give up

measured by open market values. If they received more

than the fair value of the equity given up, they would

benefit at the cost of management. If they received

less than the fair value of the equity given up, they

would be disadvantaged to the benefit of management.

FMC's claim suggests that it was harmed because its

shareholders received too much--a remarkable

proposition that was twice soundly rejected by the

District Court in Chicago prior to the transfer to this

Court. As Judge Williams pointed out, "the transaction

essentially is an instance of self-dealing" between

management and public shareholders. FMC Corp. v.

Boesky, 673 F. Supp. 242, 250 (N.D. Ill. 1987).

- 24 -

Boesky's purchases of FMC stock as the market

price advanced wiped out any premium in the deal price

over the market price that the management shareholders

expected would exist in their favor over the interests

of the public shareholders. No admissible evidence was

presented by FMC that the pre-transaction market price

of FMC stock was artificially high and did not

represent the stock's true fair value nor was there any

other indication by specific fact that the

recapitalization overcompensated FMC's public

shareholders for the equity they gave up. Further, all

shareholders, including the management shareholders,

shared in the benefits of the rise in price of FMC's

stock. * * *

The new FMC shares which were projected under the

revised recapitalization to trade at about $17.14 per

share opened actually at $19.25. This unerringly

suggests that the projected price was in fact a slight

under-valuation of the true fair value of FMC stock and

not inflated. Where "the factual context renders

[plaintiffs'] claim implausible--if the claim is one

that simply makes no economic sense--[plaintiffs] must

come forward with more persuasive evidence to support

their claim than would otherwise be necessary."

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

475 U.S. 574, 587, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d

538 (1986). FMC's bald assertion that the market price

of FMC stock was artificially high in April, 1986,

because of Boesky's buying program falls far short of

this standard and is unsupported by specific facts.

Boesky may have reaped illegal profits in trading

on the non-public information that a recapitalization

was brewing, and he was sued by FMC therefor and

settled in cash with FMC. But the only other parties

who suffered legally cognizable injury would be those

who bought or sold securities with Boesky directly, or

even indirectly through the market, not FMC, whose

recapitalization was neither executed on the market nor

approved by FMC's shareholders until May 22, 1986, well

after the non-public information had been publicly

disclosed by FMC itself: first on April 2nd when it

publicly filed its Form S-2 with the SEC and again on

May 2nd when it publicly issued its joint proxy

statement/prospectus. * * *

- 25 -

The value to FMC of keeping the financial

information confidential until April 2, 1986--allowing

FMC to consummate a recapitalization at $10 per share

less than what eventually proved to be a fair price for

the public shareholders' stock--is not a legitimate and

legally cognizable value for which FMC may seek legal

recourse. FMC's insiders were not privileged to

appropriate confidential corporate information for

their own benefit, and to the detriment of public

shareholders. "Corporate insiders ... have an

obligation to place the shareholder's welfare before

their own...." Chiarella v. United States, 445 U.S.

222, 230, 100 S. Ct. 1108, 1115-16, 63 L. Ed. 2d 348

(1980). [Id. at 633-635 (footnote refs. omitted).4]

A discussion of the value of old FMC stock was also at the heart

of the decision of the Court of Appeals for the Second Circuit in

FMC Corp. v. Boesky, 36 F.3d 255 (2d Cir. 1994), when it affirmed

Judge Pollack’s decision upon appeal. The Court of Appeals for

4

Petitioner argues that Judge Pollack did not find as a

fact that the value of old FMC stock was $97 at the time of the

recapitalization but simply concluded that petitioner did not

provide any admissible evidence to support a lower value. We do

not read this quoted language as narrowly as petitioner. All the

same, the application of collateral estoppel is not precluded

simply because a party such as petitioner did not produce all of

its evidence in the prior case. Cory v. Commissioner, 159 F.2d

391, 392 (3d Cir. 1947), affirming a Memorandum Opinion of this

Court. Evidence which, by due diligence, could have been

produced in the prior case is considered to have been available

at the first case and, to the extent relevant to the issue in

dispute, should have been introduced at the time of the prior

case. See Dean v. Commissioner, 56 T.C. 895, 900 (1971); Milberg

v. Commissioner, 54 T.C. 1562, 1566 (1970). In this regard, we

reject petitioner’s assertions that Judge Pollack made a

conscious effort to prevent it from presenting any evidence as to

the applicable value of the old FMC stock and that he otherwise

minimized the probative value of any such evidence by considering

it irrelevant to the case before him.

- 26 -

the Second Circuit began its analysis with a general overview of

the case:

At its heart, this appeal is about injury. FMC

claims it spent $220 million more on its restructuring

than it should have, and seeks to shift that cost to

Goldman because of the illegal conduct of Goldman's

employees, Brown and Brosens. FMC alleges that it is

entitled to four types of relief: first, consequential

damages based on the entire $220 million differential

between the original restructuring plan and the

consummated plan caused by Goldman's violations;

second, compensatory damages for the lost value of its

confidential information that was misappropriated and

prematurely disclosed; third, disgorgement of Boesky's

profits on the grounds that Goldman aided and abetted

his violations of Rule 10b-5; and fourth, restitution

of Goldman's $17.5 million fee because of Goldman's

breach of its contractual and fiduciary duties.

We agree with the combined decisions of district

judges Williams and Pollack that FMC has either not

alleged or is unable to prove a compensable injury.

* * * We agree that under the undisputed facts of this

case, the $220 million differential, the cost of

creating the confidential financial projections and

Goldman's fee cannot be recovered by FMC. In addition,

because FMC has failed to state a claim against Goldman

under Rule 10b-5, it cannot recover Boesky's profits.

[Id. at 260.]

The Court of Appeals for the Second Circuit discussed in

detail its reasoning for rejecting petitioner’s claim for damages

as to the $220 million differential. The court stated:

FMC seeks to recover the $220 million difference

in the amounts it paid out to shareholders under the

plan originally proposed and the one eventually

accomplished. It claims that Judge Pollack erred in

granting summary judgment because "[t]he jury could ...

reasonably conclude that Boesky's trading was a

substantial factor in the rise of the price of FMC

stock, and that the rise in the price of the stock

forced FMC to abandon its original recapitalization

- 27 -

plan." In seeking to recover the additional amounts

paid to its shareholders, FMC overlooks one important

circumstance: because the excess amounts inured to the

benefit of FMC's shareholders, FMC cannot claim that it

was injured thereby.

FMC's restructuring involved, on the one hand, a

pro rata distribution of corporate assets to the public

shareholders in return for their surrender of a portion

of the publicly held equity. The management

shareholders, in contrast, would maintain their current

equity holdings with "the result being, of course, that

management would end up with a larger proportionate

share of the reduced total equity investment in FMC."

FMC, 825 F. Supp. at 633. Aside from the purpose of

discouraging takeover bidders by simultaneously

increasing the percentage of shares held by management

and FMC's debt-to-equity ratio, the economic effect of

the transaction essentially was a wash--a zero sum

transaction in which there were no special preferences

afforded or profits to be made. By design every

shareholder was supposed to receive identical

consideration for each share given up in an amount

equal to the value of each share. [Id. at 260-261.]

The court did note initially that FMC cannot claim injury

because the additional cash payment inured to the benefit of its

shareholders. Id. at 261. This was the basis for the District

Court's dismissal of FMC's securities law claims. FMC Corp. v.

Boesky, 727 F. Supp. at 1190. However, the Court of Appeals for

the Second Circuit's decision did not rest, as alleged by

petitioner, on a legal theory of equivalence between a

corporation and its shareholders. The court explained:

FMC's duty was to provide FMC public shareholders with

consideration equal in value to that received by the

management shareholders, and to disclose fully all

information relevant to the public shareholders'

evaluation of the deal. As Judge Pollack put it, FMC

had no legitimate interest "in short-changing the

- 28 -

public shareholders in the restructure and achieving a

windfall profit for themselves, by maintaining in

confidence business information pertinent to the fair

value of the stock...." FMC, 825 F. Supp. at 633 * * *

FMC's claim that Boesky's insider trading caused

the deal to be revised therefore misses the point.

Because FMC's duties included making complete

disclosure and fully compensating its shareholders,

beyond showing that the transaction became more

expensive, FMC must at least show that it paid more for

the stock than it was worth. FMC could not seek the

"minimum premium," but rather was obligated to offer a

"fair" price. Because the shareholders were the

equitable owners of the information, no claim of injury

can lie where premature disclosure of that information

benefitted them in their dealings with the FMC. See

FMC, 825 F. Supp. at 633.

Judge Pollack determined, and we agree, that FMC

presented no evidence that the stock was not worth the

$97 per share price ultimately paid, or that the $85

per share originally contemplated was adequate to

compensate the public shareholders. See id. at 634.

* * * FMC cannot claim that Boesky stole a premium the

company was entitled to, since FMC had no legitimate

interest in realizing a gain at its public

shareholders' expense. Therefore, even if Boesky's

trades caused the stock price to rise prematurely,

because the transaction was approved by both the

shareholders and the board of directors, FMC cannot

claim injury unless it shows, at a minimum, that the

price increase also was artificial. * * *

Moreover, the court concluded that the record was sufficient

to establish that old FMC stock was worth at least $97 at the

time of the recapitalization. The court observed:

That the $97 per share figure was warranted based

on all available information is evident from the fact

that FMC's board of directors voted to increase the

cash payout and to continue to recommend the deal to

the shareholders. See Viacom Int'l Inc. v. Icahn,

946 F.2d 998, 1001 (2d Cir. 1991) (finding directors'

valuation to be relevant in establishing "fair price"

- 29 -

higher than market price), cert. denied, 502 U.S. 1122,

112 S. Ct. 1244, 117 L. Ed. 2d 477 (1992). In

addition, on April 25, 1986, three weeks after FMC

fully disclosed the projections and well after Boesky

divested his interest in the company, FMC stock was

still trading around $97 per share. Furthermore, the

"stub" share which was valued by FMC at about $17 per

share, actually opened at $19.25 per share, indicating

that the stock probably was still slightly undervalued

in the transaction despite the increased cash payout.

See FMC, 825 F. Supp. at 634. In the face of this

proof that the $97 per share figure was fair, FMC

produced no evidence to the contrary. The absence of

evidence that the $220 million increased payout

constituted something other than FMC giving its public

shareholders full consideration for their stock is

fatal to FMC's recovery of these amounts. * * *

As our quotations from the court’s opinion show, the Court

of Appeals for the Second Circuit did not merely hold that a

corporation can never be damaged when it distributes corporate

assets to the beneficial owners of those assets; i.e., the

shareholders. The essence of the court’s decision is that

petitioner failed to prove that it paid more than a fair price

for old FMC stock. As mentioned above, the absence of sufficient

proof in the prior case precludes any claim by petitioner here

that it sustained a theft loss as a result of the additional $10

per share cash payment to its public shareholders. Petitioner

simply gave its public shareholders something of value for equal

value in return.5

5

Petitioner points to the statement of the Court of Appeals

for the Seventh Circuit in FMC Corp. v. Boesky, 852 F.2d 981, 991

(7th Cir. 1988), that Brown “stole to put it bluntly”. The mere

fact that Brown “stole” the information does not mean, as

- 30 -

We conclude that the parties to the prior case actually

litigated the issue before us today and that the issue was

essential to the prior decision. Accordingly, we hold that this

element of collateral estoppel is present in the instant case.

3. Absence of Special Circumstances

We consider whether special circumstances warrant an

exception to the normal rules of preclusion. Montana v. United

States, 440 U.S. 147 (1979); Brotman v. Commissioner, 105 T.C.

141 (1995). Special circumstances include the absence of a full

and fair opportunity to litigate the issue in the prior case.

Brotman v. Commissioner, supra at 151. A mere allegation that

the earlier decision was wrong will not suffice. Id. Collateral

estoppel will not apply only if "there is reason to doubt the

quality, extensiveness, or fairness of procedures followed in

prior litigation." Montana v. United States, supra at 164 n.11.

There is no reason to question any aspect of the procedures

followed by the courts in the prior case. Those procedures amply

afforded petitioner the opportunity to litigate its case. In

fact, after the prior case was transferred to Judge Pollack,

petitioner conducted substantial discovery over a period of

almost 2 years. FMC Corp. v. Boesky, 36 F.3d at 260. The court

also held a 3-day evidentiary hearing on Goldman's motion for

petitioner would have it be, that petitioner is entitled to its

claimed theft loss.

- 31 -

summary judgment at which numerous witnesses testified. Not only

did petitioner have a full and fair opportunity to litigate the

damages issue in the prior case, it had every incentive, as the

plaintiff in that case, to litigate the issue aggressively. The

fact that petitioner may have settled with Boesky or otherwise

lacked an incentive to litigate against Boesky because he could

not pay the sought-after damages does not mean that petitioner

also lacked the same incentive as to Goldman. We conclude that

no special circumstances exist to cause us to exercise our

discretion to warrant an exception to the normal rules of

preclusion.

We hold that petitioner is collaterally estopped from

deducting a theft loss in an amount equal to the additional cash

payment of $217,649,340. Petitioner’s petition to this Court to

allow it to deduct such a theft loss is merely a request to

relitigate the applicable value of the old FMC stock in an

attempt to ascertain a value that will compel the Treasury to

subsidize petitioner’s redemption of its shares from its public

shareholders. Petitioner’s position in this Court, however,

continues to be essentially the same as the position that it

advanced in its prior case; to wit, that it was harmed because

its shareholders received too much. As recognized by Judge

Pollack when he rejected that position, the position is “a

remarkable proposition that was twice soundly rejected by the

- 32 -

District Court in Chicago”. FMC Corp. v. Boesky, 825 F. Supp. at

634.

All arguments for a contrary holding have been considered

and have been rejected as meritless to the extent not discussed

herein. Accordingly,

An order will be issued

granting respondent’s motion

for summary judgment, and

decision will be entered for

respondent.