Byrne v. C.I.R., 89-1115

• Decision Date: 22 August 1989
• Docket Number: No. 89-1115,89-1115
• Parties: 50 Fair Empl.Prac.Cas. 1108, 29 Wage & Hour Cas. (BN 747, 51 Empl. Prac. Dec. P 39,264, 64 A.F.T.R.2d 89-5430, 58 USLW 2156, 89-2 USTC P 9500 Christine A. BYRNE, Appellant, v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

Page 211

883 F.2d 211

50 Fair Empl.Prac.Cas. 1108,

29 Wage & Hour Cas. (BN 747,

51 Empl. Prac. Dec. P 39,264, 64 A.F.T.R.2d 89-5430,

58 USLW 2156, 89-2 USTC P 9500

Christine A. BYRNE, Appellant, v. COMMISSIONER OF INTERNAL REVENUE.

No. 89-1115.

United States Court of Appeals Third Circuit.

Argued June 15, 1989.

Decided Aug. 22, 1989.

Gary R. Allen, Ann Belanger Durney, Bruce Ellisen (Argued), Tax Div., Dept. of Justice, Washington, D.C., for appellee.

Mary F. Thurber (Argued), Lewis & McKenna, Saddle River, N.J., for appellant.

James I.K. Knapp, Acting Asst. Atty. Gen.

Before SLOVITER and COWEN, Circuit Judges and ROTH, District Judge. ^*

OPINION OF THE COURT

COWEN, Circuit Judge.

Christine Byrne received $20,000 in 1981 in return for her agreement not to pursue Fair Labor Standards Act ("FLSA") and state law wrongful discharge claims against her former employer. This appeal requires us to decide whether the Tax Court properly determined that one-half of these settlement proceeds represented taxable income. Because we conclude that the entire settlement is excludable under 26 U.S.C. Sec. 104(a)(2), we will reverse the order of the Tax Court.

I.

The facts of this case are discussed extensively in the Tax Court opinion, Byrne v. Commissioner of Internal Revenue, 90 T.C. 1000 (1988). We summarize them here to provide some background for our legal discussion.

In 1980, Christine Byrne was employed as a clerk in the billing department of Grammer, Dempsey & Hudson, Inc. ("Grammer"), a company engaged in the selling of steel. She had been employed with the company for twelve years.

In September 1980, the Equal Employment Opportunity Commission ("EEOC") initiated an investigation into the payroll structure of Grammer's sales department. The investigation was concerned with the disparity in pay between male and female employees in Grammer's sales department. Although Byrne was not employed in the sales department, Grammer identified her as an employee who might have informed the EEOC of the wage disparity. Soon thereafter, she was discharged from her employment with the company. In her twelve years at Grammer, Byrne had received a number of raises and promotions. She had no record of disciplinary or work performance reprimands.

The EEOC concluded that Grammer's discharge of Byrne was calculated to discourage Grammer employees from cooperating with the EEOC investigation. It filed a complaint in the Federal District Court of New Jersey which alleged that Grammer was impeding the EEOC investigation and discriminating against employees who had cooperated with the investigation. The complaint requested that the district court enjoin Grammer from intimidating and discouraging its employees from cooperating with the investigation, and also asked that the court order that Christine Byrne be immediately reinstated to her position with Grammer.

During settlement negotiations between Grammer and the EEOC, Grammer resisted the EEOC's request that it reinstate Byrne, on the basis that Byrne's presence would create further friction between management and employees. Grammer suggested that the EEOC ask Byrne if she would accept a lump-sum payment in lieu of reinstatement. When the EEOC communicated this position to Byrne she stated that she would accept $20,000 not to return to her position with Grammer. Grammer agreed to pay Byrne the $20,000. The Tax Court found that "[t]he $20,000 figure represented the value [to Byrne] of giving up both her job, including the contact with co-workers that she enjoyed for 12 years, and any claim she might have against the company." 90 T.C. at 1004.

The stipulation of settlement between Grammer and the EEOC incorporated the agreement between Byrne and Grammer. It required that Grammer "deliver within seven (7) days of the execution of this Stipulation to the Equal Employment Opportunity Commission ... a check made payable to Christine Byrne, in the amount set forth in the Release executed by Christine Byrne." App. at 29. The release specified that Byrne was to receive $20,000 in consideration for her agreement to "hereby waive, release, and forever convenant [sic] not to sue Grammer, Dempsey and Hudson, Inc., its directors, officers, agents, representatives, successors and assigns, with respect to any matter relating to or arising out of the charges or matters on which the said Stipulation of Settlement is based." App. at 31. Byrne further agreed to "remise, release, and forever discharge [the same parties] from any and all liability arising out of Civil Action No. 81-828 before the United States District Court for the District of New Jersey, Releasor's employment by Releasee, and Releasor's separation therefrom." App. at 31.

The $20,000 payment was not reflected as income on the W-2 form prepared for Byrne by Grammer, and Byrne did not include the payment as income on her 1981 income tax return. The Commissioner of Internal Revenue assessed a deficiency in Byrne's 1981 income tax of $5,561, a figure which was primarily based on the fact that Byrne did not report the $20,000 settlement as income. ¹

Byrne petitioned the Tax Court for relief from the Commissioner's notice of deficiency. That Court, after considering stipulated facts and various exhibits, held that one-half, or $10,000 of the $20,000 settlement was excludable from Byrne's income pursuant to 26 U.S.C. Sec. 104(a)(2), which excludes from gross income "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." See 90 T.C. at 1011. Byrne appeals the Tax Court's decision, contending that the entire settlement is excludable pursuant to section 104(a)(2). We have jurisdiction over her appeal pursuant to 26 U.S.C. Sec. 7482(a).

II.

We recently had occasion to review the section 104(a)(2) exclusion in the case of Bent v. Commissioner, 835 F.2d 67 (3d Cir.1987). Judge Maris succinctly summarized this provision as follows:

It is true that section 61(a) of the Internal Revenue Code of 1954 provides that, except as otherwise provided in the Code, gross income includes "all income from whatever source derived." The taxpayer, however, relies on section 104(a)(2) of the Code which provides that, with exceptions not here relevant, "gross income does not include ... (2) the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness ..." The Treasury Regulations on Income Tax provide in section 1.104-1(c) (26 C.F.R. Sec. 1.104-1(c)) that "The term 'damages received (whether by suit or agreement)' means an amount received (other than workmen's compensation) 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."

835 F.2d at 69.

The issue before the Court in Bent was whether a sum received in settlement of a claim for damages for violation of an individual's First Amendment right of free speech was excludable under this provision. The plaintiff in that case, a high school teacher, had been denied reemployment in his teaching position because he had publicly criticized the actions of school administrators. The Board of Education settled his claim for $24,000, and the Commissioner determined that the settlement was taxable income.

We rejected the Commissioner's position and held that the settlement fell within the section 104(a)(2) exclusion. We found that the allegation of a first amendment violation was a "tort type right," 835 F.2d at 69, and rejected the Commissioner's argument that because the settlement included a sum to compensate Bent for lost wages, that portion of the settlement should be taxable. Instead, we adopted the reasoning of the Court of Appeals for the Ninth Circuit in Roemer v. Commissioner, 716 F.2d 693 (9th Cir.1983), which had stated that:

The nonpersonal consequences of a personal injury, such as a loss of future income, are often the most persuasive means of proving the extent of the injury that was suffered. The personal nature of an injury should not be defined by its effect.

Id. at 699. The sum intended to compensate Bent for lost wages, we held, was excludable under section 104(a)(2). See 835 F.2d at 70; see also Threlkeld v. Commissioner, 848 F.2d 81, 84 (6th Cir.1988) (adopting reasoning of the Third and Ninth Circuits in holding that all compensation for a personal injury, even compensation for affecting that person's professional pursuits, is excludable under section 104(a)(2)).

Based upon our ruling in Bent, we reject the Commissioner's argument in this case that the settlement is taxable because it was intended, at least in part, to compensate Byrne for lost wages due to her wrongful firing. The relevant inquiry, as the Tax Court noted, is whether the settlement was received on account of personal or non-personal injuries, not whether the damages compensate the taxpayer for economic losses. To the extent that the Commissioner argues that because the settlement was intended to compensate Byrne for economic losses it is therefore compensating her for non-personal injuries, we find this argument to have been explicitly rejected in Bent, and we reject it again here.

III.

Rejecting this argument, however, does not settle the issue of whether the settlement Byrne received was on account of personal or nonpersonal injuries. As defined by the relevant regulation, personal injury claims assert violations of "tort or tort type rights." 26 C.F.R. Sec. 1.104-1(c). Byrne argues that the Tax Court erred when it characterized the claims she settled as one-half personal injury, "tort type" claims, and one-half nonpersonal injury, contract type claims. She asserts that each of the claims she settled is better characterized as a "tort or tort type" personal injury claim, and that the entire $20,000 settlement is therefore excludable under section 104(a)(2). We...