35 F.3d 93 (2nd Cir. 1994), 1793, Taggi v. United States

Docket Nº:1793, Docket 94-6008.
Citation:35 F.3d 93
Party Name:, 74 A.F.T.R.2d 94-6300, Albert J. TAGGI & Ann D. Taggi, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
Case Date:September 12, 1994
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 93

35 F.3d 93 (2nd Cir. 1994)

, 74 A.F.T.R.2d 94-6300,

Albert J. TAGGI & Ann D. Taggi, Plaintiffs-Appellants,

v.

UNITED STATES of America, Defendant-Appellee.

No. 1793, Docket 94-6008.

United States Court of Appeals, Second Circuit

September 12, 1994

Argued June 23, 1994.

Page 94

Charles A. Bradley, White Plains, NY (McCullough, Goldberger & Staudt, of counsel), for plaintiffs-appellants.

Judith L. Mogul, Asst. U.S. Atty., New York City (Mary Jo White, U.S. Atty., S.D.N.Y., Gabriel W. Gorenstein, Asst. U.S. Atty., of counsel), for defendant-appellee.

Before NEWMAN, Chief Judge, VAN GRAAFEILAND and LEVAL, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

Albert J. Taggi and his wife, Ann, appeal from a summary judgment of the United States District Court for the Southern District of New York (Goettel, J.) denying their claim for a tax refund. See 835 F.Supp. 744 (S.D.N.Y.1993). We affirm.

In December 1985, Albert Taggi, a long-time employee of AT & T Communications, Inc. ("AT & T"), was told that his employment would be terminated as part of a general reduction in AT & T's workforce. He was offered a choice of two termination payment plans. Under one option, he would receive a lump sum "termination payment" equal to three percent of his base pay, multiplied by the number of years he had worked for AT & T, up to twenty. Under the other, he would receive a lump sum "termination payment" of five percent of his base pay, multiplied by his years of service, up to twenty. The sole difference in the two plans was that AT & T conditioned receipt of the higher payment on the signing of a Separation Agreement and Release which purported to be a "full legal release."

The Separation Agreement and Release provided in pertinent part that the signatory employee gave up "any and all claims ... and causes of action with respect to, or arising out of" the employee's employment or termination of employment, including but not limited to "claims arising under federal, state, or local laws prohibiting age, sex, race or any other forms of discrimination or claims growing out of any legal restrictions on the Company's right to terminate its employees."

Taggi signed the Separation Agreement and Release on December 24, 1985 and participated thereafter in the higher payment plan. The Taggis treated the full termination payment of approximately $49,500 as income on their 1986 federal tax return.

In 1987 Taggi and eleven other terminated managers sued AT & T in the Southern District of New York, alleging violations of the Age Discrimination in Employment Act, 29 U.S.C. Secs. 621-634 (the "ADEA"). The district court dismissed their complaint, holding that the releases were valid and that the

Page 95

managers had waived their rights to sue AT & T. This Court affirmed. See Bormann v. AT & T Communications, Inc., 875 F.2d 399 (2d Cir.), cert. denied, 493 U.S. 924, 110 S.Ct. 292, 107 L.Ed.2d 272 (1989).

Thereafter, plaintiffs filed a claim for a refund of overpaid tax for 1986 totalling $7,649.40. They asserted that the additional two percent of Albert's base pay that he received from AT & T for his choice of the second termination payment option should have been excluded from their 1986 income as "damages received (whether by suit or agreement ...) on account of personal injuries or sickness" under section 104(a)(2) of the Internal Revenue Code. After the IRS disallowed their claim, the Taggis brought the instant action.

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. Sec. 61(a). The Supreme Court long has held that this definition is to be given liberal construction "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, 476, 99 L.Ed. 483 (1955). Thus, while it is well-established that section 61(a) is to be broadly construed, it is equally well-established that exclusions from income are to be narrowly construed. See Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477 (1949); United States v. Centennial Savings Bank FSB, 499 U.S. 573, 583-84, 111 S.Ct. 1512, 1518-19, 113 L.Ed.2d 608 (1991). A taxpayer claiming an exclusion from income bears the burden of proving that his claim falls within an exclusionary provision of the Code. See Galligan v. Commissioner, 66 T.C.M. (CCH) 1669, 1671, 1993 WL 526964 (1993); Gunderson v. Commissioner, 38 T.C.M. (CCH) 464, 465, 1979 WL 3189 (1979); Anderson v. Commissioner, 38 T.C.M. (CCH) 1206, 1208, 1979 WL 3368 (1979).

The exclusion relied on by appellants in the instant case, 26 U.S.C. Sec. 104(a)(2), reads as follows:

Sec. 104. Compensation for injuries or sickness

(a) In general.-- ... gross income does not include--

....

(2) the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness;

....

Treasury Regulation Sec. 1.104-1(c) provides:

(c) Damages received on account of personal injuries or sickness. Section 104(a)(2) excludes from gross income...

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