The case In re: Anthony Scott Levandowski, Case No. 20-30242 HLB, in the United States Bankruptcy Court for the Northern District of California, concerns a dispute over the taxability of a payment made by Uber to Google as part of a settlement involving Anthony Scott Levandowski. The court’s memorandum opinion and order, issued on January 24, 2025, addresses the tax implications of this payment, known as the "Uber Main Payment". The court ultimately concluded that the Uber Main Payment constituted taxable gross income to Mr. Levandowski.

Background Facts

Employment and Misconduct: Mr. Levandowski was an engineer at Google from 2007 to January 27, 2016, where he helped found Google’s autonomous vehicle project and led the development of LiDAR laser technology. His employment contracts with Google prohibited him from engaging in competing activities, soliciting Google employees, and disclosing confidential information. Despite these agreements, Mr. Levandowski formed companies, including Ottomotto LLC (“Otto”), that utilized Google’s confidential information to compete with Google in the autonomous vehicle industry.
Uber Acquisition: In Fall 2015, Mr. Levandowski began secret negotiations with Uber which led to Uber’s acquisition of Otto in mid-2016. Mr. Levandowski also solicited Google employees to join Otto, without informing Google.
Google Arbitration and Judgment: Following Uber’s acquisition of Otto, Google initiated arbitration proceedings against Mr. Levandowski. The arbitration concluded with a judgment against Mr. Levandowski totaling $179,047,998.64 (the “Google Judgment”).
Bankruptcy and Settlement: Mr. Levandowski filed for Chapter 11 bankruptcy shortly after the judgment was entered against him. Mr. Levandowski then sued Uber, arguing that Uber should pay the Google Judgment under an indemnification agreement (the “Indemnification Agreement”). This suit was settled, resulting in a payment from Uber to Mr. Levandowski totaling $2,000,000 to fund the bankruptcy plan, as well as the "Uber Main Payment" which was substantially larger.
Initial Tax Ruling: Initially, the bankruptcy court ruled that the Uber Main Payment was not taxable gross income to Mr. Levandowski, concluding it was akin to insurance. However, this ruling was vacated and remanded by the United States District Court for the Northern District of California. The District Court also remanded the order confirming Mr. Levandowski’s bankruptcy plan, with instructions to consider whether the Confirmation Order must be modified.

Legal Analysis and Court’s Findings

On remand, the bankruptcy court reconsidered the taxability of the Uber Main Payment.

Gross Income: The court referenced IRC § 61(a), which defines gross income as "all income from whatever source derived". The court emphasized that exclusions from income must be narrowly construed. Citing Comm’r v. Schleier, 515 U.S. 323, 327-28 (1995), the court recognized the sweeping scope of IRC § 61(a). The court found that the Uber Main Payment, which partially satisfied the Google Judgment, constituted gross income to Mr. Levandowski, referring to IRC § 61(a)(11) which includes income from discharge of indebtedness.
Rejection of Insurance Analogy: The court rejected Mr. Levandowski’s argument that the Uber Main Payment was analogous to non-taxable insurance payments. The court noted that, unlike insurance payments, the Uber Main Payment went directly to Google and not Mr. Levandowski. It further explained that, the Uber Main Payment was made pursuant to the settlement agreement and not the indemnification agreement. The court referenced Old Colony Trust Co. v. Comm’r, 279 U.S. 716, 729 (1929) to support its conclusion that payment by a third party to satisfy a debt is income to the debtor. It also cited Sinyard v. Comm’r, 268 F.3d 756, 758 (9th Cir. 2001), stating “If A owes B a debt, and C pays the debt on A’s behalf, it is elementary that C’s payment is income to A as well as to B”.
Indemnification Agreement: The court refuted Mr. Levandowski’s assertion that the Uber Main Payment was made under the Indemnification Agreement, referencing the language in the Settlement Agreement, which stated that no party admitted the validity of another party’s position.
Amerco Analysis: The court analyzed Mr. Levandowski’s argument that the Uber Main Payment should be considered analogous to insurance based on Amerco and Subsidiaries, and Republic Western Ins. Co. v. Comm’r, 96 T.C. 18 (1991).
- Insurance Risk: The court found that the Indemnification Agreement was more in the nature of business risk, not insurance risk, because the events that led to the indemnification had already occurred. It also noted that insurance contracts are not typically subject to negotiations like the Indemnification Agreement.
- Risk Shifting and Distribution: While the court acknowledged that the Indemnification Agreement shifted risk, it did not distribute risk among multiple insured parties. Quoting Clougherty Packing Co. v. Comm’r, 811 F.2d 1297, 1300 (9th Cir. 1987), the court observed that insurance risk distribution involves "insuring many independent risks in return for numerous premiums".
- Insurance in the Commonly Accepted Sense: The court found Mr. Levandowski failed to show Uber was organized, operated, or regulated as an insurance company, or that premiums were reasonable given the risk. The court referenced R.V.I. Guaranty Co. Ltd & Subsidiaries v. Comm’r, 145 T.C. 209 (2015) for the relevant factors when analyzing what falls within the commonly accepted notions of insurance.
- General Principles of Federal Income Taxation: The court concluded that recognizing the Uber Main Payment or the Indemnification Agreement as analogous to insurance would offend federal income taxation principles by allowing Mr. Levandowski to evade taxation, and noted that exceptions to the definition of gross income must be narrowly construed. Citing Schleier, 515 U.S. at 328, the court reiterated that exclusions from income must be narrowly construed.
Tax Benefit Rule: The court rejected the application of the Tax Benefit Rule, noting that this rule only applies when a prior deduction is later nullified by an event in a subsequent tax year. The court emphasized that the income and expense occurred in the same tax year. The court cited Hillsboro Nat’l Bank v. Comm’r, 460 U.S. 370, 377 (1983) to support its definition of the Tax Benefit Rule. The court also found that because of IRC § 67(g), Mr. Levandowski could not take a deduction for the expense, thus further invalidating this argument.
Working Condition Fringe: The court rejected Mr. Levandowski’s argument that the Uber Main Payment was a non-taxable working condition fringe under IRC § 132(d) and 132(a)(3). The court noted that at the time of the payment Mr. Levandowski was no longer an employee of Uber, and the payment was not for expenses directly related to his employment as required by Treasury Regulations. The court quoted Treas. Reg. § 1.132-1(b)(2)(i) which states, for purposes of IRC § 132(a)(3), "employee" means "any individual who is currently employed by the employer". Further, because of the application of IRC § 67(g), the payment was not deductible, which also defeats this argument.
Reimbursable Employee Expense: Lastly, the court found that the Uber Main Payment was not a reimbursable employee expense under IRC § 62(a)(2)(A). Citing Biehl v. Comm’r, 351 F.3d 982, 986 (9th Cir. 2003), the court stated that reimbursable employee expenses must be attributable to a trade or business and must have been incurred during the course of performance of services as an employee. The court determined that since the Uber Main Payment was made pursuant to the Settlement Agreement and not during Mr. Levandowski’s employment by Uber, the argument was not valid.

Conclusion

The court concluded that the Uber Main Payment constituted taxable gross income to Mr. Levandowski. The court found that none of the exclusions to gross income argued by Mr. Levandowski applied to the facts of the case.

Prepared with assistance from NotebookLM

The opinion can be read at https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/third-party-settlement-payment-taxed-income-debtor-litigant/7qnkv