Burke v. U.S.

• Decision Date: 05 April 1991
• Docket Number: No. 90-5607,90-5607
• Citation: 929 F.2d 1119
• Parties: 55 Fair Empl.Prac.Cas. 632, 56 Empl. Prac. Dec. P 40,680, 67 A.F.T.R.2d 91-749, 59 USLW 2615, 91-1 USTC P 50,175 Therese A. BURKE, Cynthia R. Center, Linda G. Gibbs, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1119

929 F.2d 1119

55 Fair Empl.Prac.Cas. 632,

56 Empl. Prac. Dec. P 40,680, 67 A.F.T.R.2d 91-749,

59 USLW 2615, 91-1 USTC P 50,175

Therese A. BURKE, Cynthia R. Center, Linda G. Gibbs Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 90-5607.

United States Court of Appeals Sixth Circuit.

Argued Dec. 7, 1990.

Decided April 5, 1991.

Joseph E. Finley (argued), Baltimore, Md., for plaintiffs-appellants.

Gary R. Allen, Acting Chief, Bruce R. Ellisen (argued), Ann Belanger Durney, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., John W. Gill, Jr., U.S. Atty., Knoxville, Tenn., Paul M. Predmore, Trial Atty., U.S. Dept. of Justice Tax Div., Washington, D.C., for defendant-appellee.

Before MERRITT, Chief Judge; JONES, Circuit Judge; and WELLFORD, Senior Circuit Judge. ^*

NATHANIEL R. JONES, Circuit Judge.

Three taxpayers, Therese A. Burke, Cynthia R. Center and Linda Gibbs, appeal the decision of the district court that funds distributed to them as part of a settlement agreement resulting from an action under Title VII alleging sex discrimination were not excludable as "damages received on account of personal injuries or sickness" under 26 U.S.C. Sec. 104(a)(2). As we find that injuries sustained in violation of Title VII are "personal injuries," and that damages resulting from such injuries are excludable from taxation under Sec. 104(a)(2), we reverse.

I.

Taxpayers brought this action seeking refunds of federal income taxes and social security taxes withheld from payments taxpayers received from their employer in settlement of a Title VII sex discrimination action. Taxpayers were employed by the Tennessee Valley Authority ("TVA") and were members of the Office and Professional Employees International Union ("the union"). In 1984, Judy A. Hutcheson, another TVA employee, filed a Title VII action in the district court against TVA alleging unlawful discrimination in the payment of salaries based upon gender. The union subsequently joined the action in its representational capacity on behalf of certain employees of TVA, including the three taxpayers in the instant case.

In their second amended complaint, Hutcheson and the union generally alleged that the TVA had discriminated against female employees when, in 1981, it had increased the salaries of employees in certain male-dominated pay schedules but did not increase salaries of employees in certain female-dominated pay schedules. Moreover, TVA allegedly lowered salaries in some female-dominated schedules. Plaintiffs sought the following relief:

Plaintiffs pray for judgment against defendants and for an order of this Court restraining and enjoining defendants from further discrimination against women in the SB schedule in wages and salaries and for a further order awarding back pay to all affected female employees in the SB schedule in an amount found to be just and proper sufficient to eliminate discrimination, for costs and for attorney's fees, and for such other relief as may be warranted in the premises.

J.App. at 33-34.

TVA filed a counterclaim against the union alleging fraud, misrepresentation, breach of contract, conspiracy with intent to defraud TVA and interference with contractual relationships. This counterclaim sought damages in the range of $30,000,000.00 (including treble and punitive damages). After both parties' claims survived cross motions for summary judgment, the parties decided to settle. The settlement agreement ("settlement") provided for the dismissal of TVA's counterclaim; a direct payment of $4200.00 to plaintiff Hutcheson; the conduct of a new regional salary survey; an amendment to the TVA/Union bargaining agreement to provide a method of salary arbitration for the future; and a lump sum payment of $5,000,000.00 to be distributed "at [the union's] discretion." Later the union asserted that distribution of the funds to the more than 8000 anticipated recipients was administratively unfeasible. Thus, an amended settlement agreement was entered into which provided that TVA would distribute the money directly to individuals designated by the union under a formula established by the union.

The formula established by the union took into consideration length of service in the affected salary schedule and rates of pay. TVA agreed to distribute the money, but only on the condition that it could withhold federal income tax and FICA tax from the payments. The union reluctantly agreed and the money was distributed. It is important to note that TVA did not tax its direct payment of $4,200.00 to Hutcheson. Nor did TVA tax the monies left over as undeliverable to named individuals which were turned over to the union. Further, those funds, when distributed by Union to other employees, were not taxed.

On December 6, 1988, Betty K. Adkins, Cathy Elaine Adkins, Edward Bailey and "more than 1,000 other persons" filed the instant tax refund action. Later plaintiffs filed a motion to amend their complaint and dismiss without prejudice all the plaintiffs except the three taxpayers named in this action. The motion was granted and the present action ensued.

II.

This appeal raises the question of whether damages received in a settlement agreement in a Title VII action for sex discrimination are excludable as damages for "personal injury" under Internal Revenue Code Sec. 104(a)(2). Whether the lower court properly applied Sec. 104(a)(2) to disputed funds is a question of law and reviewed de novo. Threlkeld v. Commissioner, 848 F.2d 81, 83 (6th Cir.1988) (citing Roemer v. Commissioner, 716 F.2d 693, 696 (9th Cir.1983)).

As a general rule, under the Internal Revenue Code, "gross income means all income from whatever source derived." 26 U.S.C. Sec. 61(a). Thus, all accessions of wealth are presumed to be "gross income" unless the taxpayer can show that the accession falls within a specific exclusion under the I.R.C. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430, 75 S.Ct. 473, 476, 99 L.Ed. 483 (1955). Section 104(a)(2) provides that "gross income does not include ... 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...." Several courts have held that for the purposes of Sec. 104(a)(2), "personal injuries" means both physical and nonphysical injuries. See Pistillo v. C.I.R., 912 F.2d 145, 148 (6th Cir.1990) (injury involved age discrimination); Rickel v. Commissioner, 900 F.2d 655, 658 (3rd Cir.1990) (age discrimination); Bent v. Commissioner, 835 F.2d 67, 70 (3rd Cir.1987) (deprivation of first amendment rights); Roemer v. Commissioner, 716 F.2d 693, 697 (9th Cir.1983) (defamation). Treasury regulations define a claim for personal injuries under Sec. 104(a)(2) as one which is based upon "tort or tort-type rights." 26 C.F.R. Sec. 1.104-1(c) (1990). Essentially, the "exclusion under Sec. 104(a)(2) is that the income involved must derive from some sort of tort claim against the payor." Glynn v. Commissioner, 76 T.C. 116, 119 (1981).

We see the question presented to us in this appeal as a quite narrow one. In Threlkeld v. Commissioner, 87 T.C. 1294, 1299 (1986), aff'd, 848 F.2d 81 (6th Cir.1988), the entire tax court, in a 15-1 decision, held that the test for determining whether a specific damage award qualified for the Sec. 104(a)(2) exclusion is as follows:

Section 104(a)(2) excludes from income amounts received as damages on account of personal injuries. Therefore, whether the damages received are paid on account of "personal injuries" should be the beginning and end of the inquiry. To determine whether the injury complained of is personal, we must look to the origin and character of the claim ..., and not to the consequences that result from the injury.

(emphasis added). In other words, determining whether the Sec. 104(a)(2) exclusion applies requires an examination of the nature of the injury to determine whether the injury and claim are personal and tort-like in nature, and not whether the consequences of the injury resulted in an award of compensatory damages or damages for back pay. See Pistillo v. C.I.R., 912 F.2d 145, 148-49 (6th Cir.1990). Thus, our inquiry is limited to whether injuries resulting from sex discrimination in violation of Title VII are "personal injuries" for the purposes of Sec. 104(a)(2).

Courts have long held that injuries resulting from invidious discrimination, be it on the basis of race, sex, national origin or some other unlawful category, are injuries to the individual rights and dignity of the person. See, e.g. Goodman v. Lukens Steel Co., 482 U.S. 656, 661, 107 S.Ct. 2617, 2621, 96 L.Ed.2d 572 (1986) (race discrimination, challenged under Sec. 1981, is a fundamental injury to the individual rights of the person); Thompson v. Commissioner, 866 F.2d 709, 712 (4th Cir.1989) (sex discrimination is an injury to the person); cf. Wilson v. Garcia, 471 U.S. 261, 277, 105 S.Ct. 1938, 1947, 85 L.Ed.2d 254 (1985) (analogizing a violation of the Civil Rights Acts of 1871 to a violation of the fourteenth amendment which sounds in tort as an injury to the person); Tillman v. Wheaton-Haven Recreation Ass'n, 517 F.2d 1141, 1143 (4th Cir.1975) ("an action brought under statutes forbidding racial discrimination is fundamentally for the redress of a tort."); Curtis v. Loether, 415 U.S. 189, 195-96 n. 10, 94 S.Ct. 1005, 1009 n. 10, 39 L.Ed.2d 260 (1974) (analogizing racial discrimination to a "dignitary tort."). This long-held view of the tort-like nature of the injury resulting from unlawful discrimination has led this court and others to the conclusion that damages resulting from an action for unlawful discrimination are "damages on account of personal injury" for the purposes of Sec. 104(a)(2). See, e.g. Pistillo v. C.I.R., 912 F.2d 145 (6th Cir.1990) (injuries resulting from age discrimination in violation of the Age Discrimination in Employment Act are...