Bowman v. U.S.
| Decision Date | 05 August 1987 |
| Docket Number | No. 86-1595,86-1595 |
| Citation | 824 F.2d 528 |
| Parties | 44 Fair Empl.Prac.Cas. 783, 44 Empl. Prac. Dec. P 37,345, 60 A.F.T.R.2d 87-5443, 87-2 USTC P 9544, Unempl.Ins.Rep. CCH 17,490 William D. BOWMAN and Charlotte N. Bowman, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
William D. Bowman, pro se.
R. Todd Luoma, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., Ellen Christensen, Asst. U.S. Atty., Detroit, Mich., Michael L. Paup (Lead Counsel), Roger M. Olsen, Tax Div.--Dept. of Justice, Washington, D.C., Richard Farber, John J. Boyle, for U.S.
Before MERRITT and MARTIN, Circuit Judges, and BROWN, Senior Circuit Judge.
The main issue presented in this appeal concerns whether the District Court correctly held that back wages paid to plaintiff in 1981 by his employer pursuant to the settlement of a discrimination suit were subject to FICA taxation in 1981, the year in which the award was received but subsequent to the years to which the back pay relates.
In the mid-1970's, Mr. Bowman filed a race discrimination suit against his employer, Ford Motor Company. In settlement of that suit the parties agreed that Ford would pay Mr. Bowman back wages in the amount of $136,544.23 and that Mr. Bowman would apply for and accept immediate retirement. Under the terms of the settlement, Mr. Bowman continued to be entitled to his normal retirement benefits. On December 16, 1980, the settlement was approved by an order of this Court, and subsequently in January, 1981, the United States District Court for the Eastern District of Michigan entered judgment on the settlement.
Mr. Bowman retired on February 1, 1981, and he received the full amount of the settlement in 1981. Ford paid Mr. Bowman total wages of $143,563.97 in 1981. In addition to the wages paid pursuant to the settlement, this amount included some $7,000 for wages Mr. Bowman earned, prior to his retirement, in January, 1981, and payment for vacation time he accumulated in 1980. In 1981, Ford withheld FICA taxes of $1975.05 from Mr. Bowman's wages based on the application of the FICA tax rate to wages of $29,700, which was the maximum amount of wages subject to FICA taxation in 1981. On their 1981 joint income tax return taxpayers William and Charlotte Bowman reported the total wages of $143,563.97 they had received from Ford in 1981 as income for federal income tax purposes that year.
In May, 1985, taxpayers filed pro se the instant refund suit in the United States District Court for the Eastern District of Michigan. As the first count in their complaint, taxpayers alleged that the settlement wages Mr. Bowman received in 1981 were exempt from FICA taxation and sought a refund of that portion of the FICA taxes attributable to those wages. In support of this claim, taxpayers contended: (1) that the settlement was approved in December, 1980, and therefore the settlement wages were constructively received in 1980, not 1981, and Mr. Bowman had previously paid the maximum FICA tax for 1980, and (2) that, in any event, FICA taxation of the settlement wages was improper because those wages represented back wages for years in which Mr. Bowman had paid maximum FICA taxes.
On March 31, 1986, a hearing on a Government motion for summary judgment was held in the District Court. The District Court rendered an opinion from the bench. In that opinion the court agreed with the Government that the settlement wages were subject to FICA taxation. In this regard, the court found that the settlement wages did not fall within any statutory exemption from FICA taxation, that because the wages were paid in 1981 they were subject to FICA taxation in that year, notwithstanding that the wages represented compensation paid for work performed in earlier years, and that the wages could not be treated as having been constructively received in 1980.
The basic question in this case relates to the proper timing of FICA taxation for the settlement received by Mr. Bowman: whether the back pay should be taxable in the year the award is received, as the District Court held, or in the year or years to which the back pay relates, as taxpayers claim. In particular, we address the following language from the District Court's bench disposition: Tr. 4.
Pursuant to the Federal Insurance Contributions Act, 26 U.S.C. Secs. 3101-3126 (1982), Section 3101 of the Internal Revenue Code imposes a tax on employees for old-age survivors and disability insurance, commonly known as social security. Assessed as a percentage of the wages an employee earns, the FICA tax is collected by the employer, who deducts the amount of the tax from the wages he pays. See 26 U.S.C. Sec. 3102 (1982). Section 3121(a) of the Code defines "wages" for purposes of FICA tax as "all remuneration for employment" unless specifically excepted under the provisions of Section 3121(a)(1) through (a)(20). Section 3121(b) defines "employment," in pertinent part, as
The employee tax attaches at the time that the wages are received by the employee. Treas.Reg. Sec. 31.3101-3 (1954). The regulations provide further that Treas.Reg. Sec. 31.3121(a)-2(a) (1954).
In our view, the FICA tax treatment of the settlement involved in this case basically raises an allocation issue. The parties agree that the settlement award constituted wages for employment. Accordingly, we consider the Supreme Court decision in a similar context, Social Security Bd. v Nierotko, 327 U.S. 358, 66 S.Ct. 637, 90 L.Ed. 718 (1946). In that case the Supreme Court considered the issue of whether a "back pay" award under the National Labor Relations Act to an employee who was wrongfully discharged should be treated under the Social Security Act as "wages" for which the employee is entitled to credit on his Old Age and Survivors Insurance Account. The Court held that such back pay did constitute wages under the Social Security Act.
The Court held further that the back pay treated as wages should be allocated to the periods for which the wages would have been paid. The Court stated:
Petitioner further questions the validity of the decision of the circuit court of appeals on the ground that it must be inferred from the opinion that the "back pay" must be allocated as wages by the Board to the "calendar quarters" of the year in which the money would have been earned, if the employee had not been wrongfully discharged. We think this inference is correct.
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If, as we have held above, "back pay" is to be treated...
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