Pipitone v. US, 98-3624.

Citation180 F.3d 859
Decision Date14 June 1999
Docket NumberNo. 98-3624.,98-3624.
PartiesAndrew PIPITONE and Joanne Pipitone, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Andrew Pipitone (argued), Chicago, IL, Plaintiff-Appellant Pro Se.

Joanne Pipitone, Chicago, IL, Plaintiff-Appellant Pro Se.

Bruce R. Ellisen (argued), Donald J. Tobin, Department of Justice, Tax Division, Appellate Section, Washington, DC, for Defendant-Appellee.

Before WOOD, JR., RIPPLE, and KANNE, Circuit Judges.

KANNE, Circuit Judge.

Andrew and Joanne Pipitone filed suit for a refund from a federal income tax payment in the amount of $32,511 for the 1995 taxable year. This amount was paid as part of a $95,000 payment Andrew Pipitone ("Pipitone") received from his employer, CNA Insurance Companies ("CNA"), at the time of the termination of his employment. The district court granted the government's motion for summary judgment, concluding that Pipitone failed to introduce any evidence to support his claim for a tax refund. Because we agree that summary judgment was properly entered in favor of the government, we affirm.

I. HISTORY

Andrew Pipitone worked in the claims department of CNA from December 1981 until the termination of his employment on January 13, 1995. At that time, Pipitone was forty-nine years old, and he states that his job title was "Director of Strategic Claims."

As part of the termination of his employment, CNA and Pipitone entered into an agreement entitled "General Release in Full and Settlement Agreement" ("Settlement Agreement"), which is largely reproduced in the district court's opinion. See Pipitone v. United States, 17 F.Supp.2d 793, 794 (N.D.Ill.1998). Pursuant to the terms of the Settlement Agreement, CNA agreed to pay Pipitone the equivalent of fifty-two weeks salary in the amount of $95,000 less applicable federal, state, and local deductions, and to provide Pipitone with outplacement services and continued coverage under the company's health plan. For his part, Pipitone agreed to release and discharge any right to other severance or benefits and any claims under the Age Discrimination in Employment Act of 1967 ("ADEA") he may have had against CNA. Pipitone additionally agreed to forego any other legal action against CNA. The Settlement Agreement also contained an integration clause and a complete disclaimer of liability on the part of CNA, which stated: "It is agreed and understood that the Company denies the existence of any liability to you and that the instant Agreement is intended solely to accomplish a settlement and is not to be construed as an admission of fault or liability of any kind or nature on the part of the Company."

Although Pipitone reported the $95,000 payment as income on his 1995 income tax Form 1040 and paid the required tax on this amount, he filed an amended tax return Form 1040X in August 1996. In his amended return, Pipitone excluded as income the $95,000 he received from CNA and sought a refund of the $32,511 in taxes he paid on this amount. Pipitone claimed that this amount was properly excludible under 26 U.S.C. § 104(a)(2), because it constituted a payment made in consideration for his release of any claims he might have had against CNA for age discrimination and other potential tort claims.

The Internal Revenue Service ("IRS") rejected Pipitone's claim for a tax refund, concluding that under the Supreme Court's decision in Commissioner v. Schleier, 515 U.S. 323, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995), "back pay and liquidated damages recovered through the settlement of a claim under the age discrimination in employment act are not excludible from gross income." After the IRS rejected his written appeal, Pipitone filed suit in district court. The district court granted the government's motion for summary judgment based on its conclusion that Pipitone failed to introduce any evidence supporting his argument that he received the payment from CNA as part of a settlement agreement for personal injuries arising from his claims of age discrimination, slander, and libel, and, therefore, the payment was properly excludible from income under § 104(a)(2).

II. ANALYSIS
A. Standard of Review

We review a district court's grant of summary judgment de novo. See Adler & Drobny, Ltd. v. United States, 9 F.3d 627, 629 (7th Cir.1993); Hefti v. Internal Revenue Serv., 8 F.3d 1169, 1171 (7th Cir.1993). Summary judgment is proper when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In determining whether a genuine issue of material fact exists, courts must construe all facts in the light most favorable to the non-moving party and draw all reasonable and justifiable inferences in favor of that party. See Hefti, 8 F.3d at 1171. "A genuine issue for trial exists only when a reasonable jury could find for the party opposing the motion based on the record as a whole." Roger v. Yellow Freight Sys., Inc., 21 F.3d 146, 149 (7th Cir.1994).

B. Pipitone's Claim for a Tax Refund

This case involves the interplay between two sections of the Internal Revenue Code governing exclusions from gross income—§ 61(a) and § 104(a)(2). Section 61(a) of the Internal Revenue Code states that, except as otherwise provided, "gross income means all income from whatever source derived. . . ." 26 U.S.C. § 61(a). The Supreme Court has repeatedly recognized the broad scope of this section and the liberal construction it is to be afforded "in recognition of the intention of Congress to tax all gains except those specifically exempted." Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430, 75 S.Ct. 473, 99 L.Ed. 483 (1955). In contrast to the liberal construction afforded to § 61(a), exclusions from income are narrowly construed. See Schleier, 515 U.S. at 328, 115 S.Ct. 2159; Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 93 L.Ed. 477 (1949). In essence, all accessions to wealth are taxable unless the taxpayer demonstrates that the gain at issue fits within a particular statutory exclusion from income. See Downey v. Commissioner, 33 F.3d 836, 837 (7th Cir.1994). And, in a tax refund suit, the taxpayer bears the burden of proving the amount he is entitled to recover. See United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976).

Section 104(a)(2) excludes from income any "damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness." 26 U.S.C. § 104(a)(2). The term "damages received" is defined by Treasury Regulation 1.104-1(c) as "an amount received . . . through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution." Treas. Reg. § 1.104-1(c).

As clarified by the Supreme Court in Schleier, an amount received may be excluded from gross income only when it is received both (1) through the prosecution of an action or the settlement entered into in lieu of prosecution of an action based upon tort or tort-type rights and (2) on account of personal injuries or sickness. 515 U.S. at 337, 115 S.Ct. 2159; see also United States v. Benson, 67 F.3d 641, 645 (7th Cir.1995). In cases in which damages are received pursuant to a written settlement agreement, the focus is on the origin and characteristics of the claims settled in determining whether such damages are excludible under § 104(a)(2). See United States v. Burke, 504 U.S. 229, 237, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992). For purposes of § 104(a)(2), we look to state law in determining the nature of the claim. See Burnet v. Harmel, 287 U.S. 103, 110, 53 S.Ct. 74, 77 L.Ed. 199 (1932) ("The state law creates legal interests, but the federal statute determines when and how they shall be taxed.").

The first requirement under Schleier is the existence of a claim based upon tort or tort-type rights. 515 U.S. at 337, 115 S.Ct. 2159. The claim must be bona fide, but not necessarily valid or sustainable. See Taggi v. United States, 35 F.3d 93, 96 (2d Cir.1994). Claims for potential future personal injuries do not qualify for exclusion under § 104(a)(2); by implication, there must be an existing claim. See Lubart v. Commissioner, 154 F.3d 539, 542 (5th Cir.1998) ("In order to prevent . . . contrived settlements, the courts must require the presence of an actual dispute. If section 104(a)(2) were construed to encompass releases of potential unspecified future claims, . . . manufacturing section 104(a)(2) tax treatment would be simple.").

Pipitone contends that his tort or tort-type claims stemmed from CNA's engagement "in a course of conduct that wrongfully and illegally subjected him to a great deal of harassment and humiliation." Specifically, Pipitone's claims arose from a poor performance appraisal and subsequent transfer from the Claims Department where he had worked for a period of twelve years. He states that "this conduct caused him embarrassment and to become physically and emotionally injured as well as damage to his personal reputation by the false statements made and published in a performance review." Pipitone contends that he discussed these issues with CNA.

Pipitone argues that the $95,000 he received from CNA pursuant to the Settlement Agreement upon the termination of his employment represents CNA's payments to him as a result of his bona fide claims for personal injuries arising from age discrimination under the Illinois Human Rights Act, 775 Ill. Comp. Stat. 5/101 et seq., and slander and libel...

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