Downey v. Comm'r of Internal Revenue

• Decision Date: 29 June 1993
• Docket Number: No. 11120–89.,11120–89.
• Citation: 100 T.C. No. 40,100 T.C. 634,62 Fair Empl.Prac.Cas. (BNA) 361,62 USLW 2063,63 Empl. Prac. Dec. P 42631
• Parties: Burns P. DOWNEY and Marjorie Downey, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent *.
• Court: U.S. Tax Court

100 T.C. 634

100 T.C. No. 40

62 Fair Empl.Prac.Cas. (BNA) 361

62 USLW 2063

63 Empl. Prac. Dec. P 42,631

Burns P. DOWNEY and Marjorie Downey, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent *.

No. 11120–89.

United States Tax Court

June 29, 1993.

Steven E. Reick, for petitioners.

Marjorie A. Gilbert, James F. Hanley, Jr. and Jan E. Lamartine, for respondent.

SUPPLEMENTAL OPINION

RUWE, Judge:

This case is before the Court on respondent's motion to reconsider our opinion in Downey v. Commissioner, 97 T.C. 150 (1991), in light of the Supreme Court's decision in United States v. Burke, 504 U.S. 229, 112 S.Ct. 1867 (1992). In our previous opinion, we held that the entire amount received by petitioner Burns P. Downey in settlement of a suit brought under the Age Discrimination in Employment Act of 1967 (ADEA), Pub.L. 90–202, 81 Stat. 602 (current version at 29 U.S.C. secs. 621–634 (1988)), was excludable under section 104(a)(2).¹

The issue in United States v. Burke, supra, was whether an award of backpay based on a sex discrimination claim under title VII was excludable under section 104(a)(2). The Supreme Court held that only damages received on account of a claim that redresses a tort-like personal injury are excludable under section 104(a)(2). Id. at ––––, 112 S.Ct. at 1872. The mere fact that discrimination caused harm to its victim does not mean that it was a tort-like personal injury for purposes of section 104(a)(2).

It is beyond question that discrimination in employment on the basis of sex, race, or any of the other classifications protected by Title VII is, as respondents argue and this Court consistently has held, an invidious practice that causes grave harm to its victims. The fact that employment discrimination causes harm to individuals does not automatically imply, however, that there exists a tort-like “personal injury” for purposes of federal income tax law. [ Id. at ––––, 112 S.Ct. at 1872–1873; citations omitted.]

With respect to whether a sex discrimination claim under title VII was a tort-like personal injury claim, the Supreme Court stated:

No doubt discrimination could constitute a “personal injury” for purposes of § 104(a)(2) if the relevant cause of action evidenced a tort-like conception of injury and remedy. * * * [ Id. at ––––, 112 S.Ct. at 1873; emphasis added.]

The Supreme Court found that one of the hallmarks of traditional tort liability was the availability of a broad range of damages to compensate the victim. These included damages for intangible elements of injury that were not pecuniary in their immediate consequences. The Court also found that punitive or exemplary damages are generally available in tort actions where the defendant's conduct was intentional or reckless. Id. at ––––, 112 S.Ct. at 1871, 1872. In deciding whether a title VII claim evidenced a tort-like conception of injury and remedy, the Supreme Court focused on the remedies “available” under the statutory provisions of title VII. Id. at ––––, 112 S.Ct. at 1871–1874.² The Supreme Court found that

in contrast to the tort remedies for physical and nonphysical injuries discussed above, Title VII does not allow awards for compensatory or punitive damages; instead, it limits available remedies to backpay, injunctions, and other equitable relief. * * * [ Id. at ––––, 112 S.Ct. at 1873.³]

Because of the limited remedy provided by title VII, the Supreme Court concluded:

Thus, we cannot say that a statute such as Title VII, whose sole remedial focus is the award of backwages, redresses a tort-like personal injury within the meaning of sec. 104(a)(2) and the applicable regulations. [ Id. at ––––, 112 S.Ct. at 1874; fn. refs. omitted.⁴]

The issue we must decide is whether Mr. Downey's discrimination claim under the ADEA constitutes a tort-like personal injury claim for purposes of section 104(a)(2). If the answer is yes, any damages received on account of that claim are excludable. Horton v. Commissioner, 100 T.C. 93, 97 (1993) (slip op. at 7).

In contrast to title VII, the ADEA offers a range of remedies, including both unpaid wages and “liquidated damages”. Liquidated damages under the ADEA have been held to “serve both a compensatory and a deterrent or punitive function.” Downey v. Commissioner, supra at 172; Rickel v. Commissioner, 92 T.C. 510, 521 (1989), revd. on other grounds 900 F.2d 655 (3d Cir.1990). “Liquidated damages” under the ADEA serve to compensate the victim of age discrimination for certain nonpecuniary losses. Downey v. Commissioner, supra at 170. This is a remedy traditionally associated with tort claims. United States v. Burke, 504 U.S. at ––––, 112 S.Ct. at 1873. The fact that “liquidated damages” also serve a deterrent or punitive purpose further supports the conclusion that a claim under the ADEA is tort-like. Indeed, the Supreme Court in Burke noted that punitive or exemplary damages are generally available in tort actions where the defendant's misconduct was intentional or reckless. Id. at ––––, 112 S.Ct. at 1871, 1872; ⁵ see Horton v. Commissioner, supra (holding punitive damages received on account of personal injury excludable under section 104(a)(2)).

We hold that the ADEA compensation scheme evidences a tort-like conception of injury and remedy. It follows that discrimination under the ADEA constitutes a tort-like personal injury for purposes of section 104(a)(2), and all damages received by Mr. Downey on account of his ADEA claim are excludable from income. See Horton v. Commissioner, supra. We therefore reaffirm our original holding in this case.

Decision will be entered under Rule 155.

Reviewed by the Court.

HAMBLEN, PARKER, SHIELDS, CLAPP, SWIFT, GERBER, PARR, WELLS, COLVIN and CHIECHI, JJ., agree with the majority.

COHEN Judge, concurring in the result:

I dissented in Downey v. Commissioner, 97 T.C. 150, 174 (1991) (Downey I), and I continue to believe that the result reached by the majority in that opinion is wrong. I would hold in this case that only the liquidated damages were received on account of the tort of willful discrimination and that the back wages were received on account of nontortious breach of the implied terms of the taxpayer's employment. See Downey I, 97 T.C. at 177–178 (Cohen, J., concurring in part and dissenting in part).

I do not believe that United States v. Burke, 504 U.S. 229, 112 S.Ct. 1867 (1992), supports the result reached by the majority. The majority opinion refers to a “range of remedies, including both unpaid wages and ‘liquidated damages'.” Majority op. p. 6. Two categories of statutory remedies do not strike me as constituting a range. In actions brought under the Age Discrimination in Employment Act of 1967 (ADEA), Pub.L. 90–202, 81 Stat. 602 (current version at 29 U.S.C. secs. 621–634 (1988)), the Courts of Appeals have unanimously denied damages for pain and suffering and emotional distress—typical tort remedies. See, e.g., Wilson v. Monarch Paper Co., 939 F.2d 1138, 1144 (5th Cir.1991); Haskell v. Kaman Corp., 743 F.2d 113, 120–121 n. 2 (2d Cir.1984), and cases cited therein. Moreover, under Burke, if a plaintiff alleging wrongful termination of employment is only entitled to back wages, that award is taxable. Under this case, if such a plaintiff either proves willfulness or by settlement receives twice the amount of back wages, none of the award is taxable. The Supreme Court in Burke held that an award of back wages was taxable; nothing in that opinion states that adding liquidated damages to such an award makes the total nontaxable. Without a clearer indication from the Supreme Court, I cannot agree that this anomalous result is correct.

I concur here, however, because I believe that United States v. Burke, supra, does not provide a clear-cut reason for changing the result in Downey I, and all presently extant authorities dealing specifically with ADEA claims support petitioners' position. See Redfield v. Insurance Company of North America, 940 F.2d 542 (9th Cir.1991); Pistillo v. Commissioner, 912 F.2d 145 (6th Cir.1990), revg. T.C.Memo. 1989–329; Rickel v. Commissioner, 92 T.C. 510 (1989), affd. in part and revd. in part 900 F.2d 655 (3d Cir.1990).

HALPERN, Judge, concurring:

The issue is whether petitioner Burns P. Downey's claim under the Age Discrimination in Employment Act of 1967 (ADEA) Pub.L. 90–202, 81 Stat. 602 (current version at 29 U.S.C. secs. 621–634 (1988)), was for a “tort-like personal injury”, for purposes of section 104(a)(2). The majority answers that question in the affirmative and I agree. The majority goes much further, however, opining that all claims under the ADEA meet that standard, including claims that, in my view, are dissimilar to Mr. Downey's in pertinent respects. I believe the majority's rationale to be overbroad and therefore respectfully cannot join.

Section 104(a)(2) excludes from gross income “damages received * * * on account of personal injuries or sickness”. In order for a receipt to be excluded from gross income by section 104(a)(2), the following requirements must be satisfied: (1) The receipt must constitute “damages”, meaning an amount obtained through an action or settlement based on tort or tort type rights, sec. 1.104–1(c), Income Tax Regs.; (2) there must be a personal injury; and (3) the damages must have been received on account of such personal injury. The Supreme Court, in United States v. Burke, 504 U.S. 229, 112 S.Ct. 1867 (1992), created a convenient shorthand for these requirements, stating that, to be excludable under section 104(a)(2), an amount must have been received on account of a “tort-like personal injury”.

The Supreme Court held that, in determining whether an injury is tortlike, we must consider the remedies available under the cause of action at issue.

No doubt discrimination could constitute a “personal injury” for purposes of § 104(a)(2) if the relevant cause of action evidenced a tort-like conception of injury and remedy. * * * [ Id. at ––––, 112 S.Ct....