Chamberlain ex rel. Chamberlain v. U.S.
| Citation | 401 F.3d 335 |
| Decision Date | 18 February 2005 |
| Docket Number | No. 03-31136.,03-31136. |
| Parties | Chad Anthony CHAMBERLAIN, By and Through His Curator, Wilmer Joseph CHAMBERLAIN and His Under-Curatrix, Beverly LeBlanc Chamberlain; Wilmer Joseph Chamberlain; Beverly LeBlanc Chamberlain, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
William A. Porteous, III (argued), Porteous, Hainkel & Johnson, New Orleans, LA, for Plaintiffs-Appellants.
Samuel Ashby Lambert (argued), Bruce Raleigh Ellisen, U.S. Dept. of Justice, Tax Div., Washington, DC, for Defendant-Appellee.
Appeals from the United States District Court for the Eastern District of Louisiana.
Before KING, Chief Judge, and HIGGINBOTHAM and DAVIS, Circuit Judges.
Chad Chamberlain, by and through his parents Wilmer and Beverly Chamberlain,1 brought suit against the United States seeking recovery of over one million dollars in income tax assessed against prejudgment interest awarded in a personal injury lawsuit. The Chamberlains argued that prejudgment interest recovered in a personal injury suit is excluded from taxation by section 104(a)(2) of the Internal Revenue Code ("section 104(a)(2)"). The district court rejected their argument, finding that prejudgment interest received in a personal injury suit is not received "on account of" the personal injury. We affirm.
Chad Chamberlain was severely injured while swimming due to the negligence of the State of Louisiana. A lawsuit against the State produced total damages of $9,253,551.58, of which $3,791,741.53 was attributable to prejudgment interest. The IRS assessed income tax against the prejudgment interest component of the award, and the Chamberlains paid the required amount under protest.2 The Chamberlains sought a refund, and received a certified letter from the IRS informing them that their claims had been fully disallowed. They timely filed suit in the U.S. District Court for the Eastern District of Louisiana seeking recovery of the contested amount.
The district court granted summary judgment in favor of the United States. The court found that federal law controls the tax treatment of prejudgment interest awarded under Louisiana law.3 Applying federal law, the district court found that the Chamberlains' prejudgment interest award was taxable as gross income, and was not excluded from taxation under section 104(a)(2).
In making this determination, the court applied the two-part test articulated by the Supreme Court for determining whether an amount is excluded under section 104(a)(2). Under this test, the taxpayer must 1) demonstrate that the underlying cause of action giving rise to the recovery is based upon a tort or tort type rights; and 2) show that the damages were received on account of personal injuries or sickness.4 The district court found that the Chamberlains satisfied the first part of the test, but faltered on the second. Citing to cases decided by the First, Third and Tenth Circuits addressing the applicability of section 104(a)(2) to prejudgment interest, the district court found that prejudgment interest was paid to compensate injured parties for their lost time value of money, and not their personal injuries.5 In addition, the district court deemed it irrelevant that, unlike some common law jurisdictions, prejudgment interest is classified as part of a plaintiff's reparation damages under Louisiana Civil Law:
While the Court acknowledges the unique legal history of Louisiana and the important contributions of the scholars cited by the plaintiffs, it does not change the treatment of such interest under the federal tax laws. Prejudgment interest may be considered part of damages under Louisiana law, but, nonetheless, it is not received "on account of" personal injuries. Instead, it is received on account of the time delay. Therefore, prejudgment interest is taxable under the Federal Tax Code.6
The Chamberlains filed a timely notice of appeal.
On appeal, the Chamberlains argue that the district court erred in finding that prejudgment interest awarded under Louisiana law in a personal injury suit is taxable.7 We review the district court's decision de novo.8
The Chamberlains' argument presents a question of first impression for our court. Accordingly, we begin our analysis with a review of the pertinent provisions of the Internal Revenue Code.
In order for a specific amount to be subject to federal income tax, it must first come within the Internal Revenue Code's definition of "gross income." Section 61(a) of the Code broadly defines gross income as "all income from whatever source derived."9 The Supreme Court has repeatedly emphasized the sweeping scope of this definition, holding that Congress intended section 61(a), as well as its statutory predecessors, to exert the "full measure of its taxing power."10 In contrast, the Court has held that exclusions from gross income must be construed narrowly.11
The parties do not dispute, and we have no difficulty finding, that prejudgment interest awarded under Louisiana law in a personal injury suit constitutes gross income, and is therefore taxable unless it comes within an exclusion.12 The Chamberlains argue that their prejudgment interest award is excluded from tax under section 104(a)(2) of the Code.
As in effect for the 1994 tax year, section 104(a)(2) provides that gross income does not include "the amount of any damages received ... on account of personal injuries or sickness."13 The words "on account of" do not readily admit of a precise and unambiguous meaning,14 and neither the Code nor the relevant Treasury Regulations attempt to define them.15 Thus, we must turn to Supreme Court precedent for guidance.
The Supreme Court has decided three seminal cases interpreting section 104(a)(2). Although these cases do not consider the question of whether prejudgment interest is excluded from taxation, they provide the basic legal framework within which this question must be addressed.
In the first of these cases, United States v. Burke,16 the Court held that a backpay award received in settlement of a claim brought under Title VII of the Civil Rights Act of 1964 was not excluded from gross income under section 104(a)(2). The Court found that, in order for an award of damages to come within section 104(a)(2), it must redress a tort like personal injury.17 Noting that "[r]emedial principles... figure prominently in the definition and conceptualization of torts," the Court construed "damages" and "personal injury" broadly to encompass damages awarded to compensate plaintiffs for both physical and non-physical injuries.18 Applying these general principles to Title VII, the Court found that an award of backpay to compensate plaintiffs for wages properly due and taxable did not redress a tort like personal injury within the meaning of section 104(a)(2), and failed to compensate plaintiffs for "any of the other traditional harms associated with personal injury, such as pain and suffering, emotional distress, harm to reputation, or other consequential damages (e.g., a ruined credit rating)."19
The Supreme Court extended this analysis in Commissioner v. Schleier,20 holding that an award of backpay and liquidated damages received in settlement of a claim brought under the Age Discrimination in Employment Act of 1967 was not excluded under section 104(a)(2). In reaching this conclusion, the Court announced two independent requirements that must be met for an amount to be excluded from taxation under section 104(a)(2): "[f]irst, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is based upon tort or tort type rights; and second, the taxpayer must show that the damages were received on account of personal injuries or sickness."21 The Court emphasized the independent nature of these two inquiries, noting that "[t]he regulatory requirement that the amount be received in a tort type action is not a substitute for the statutory requirement that the amount be received `on account of personal injuries or sickness'; it is an additional requirement."22
In O'Gilvie v. United States,23 the Supreme Court applied this test and held that punitive damages received in connection with a wrongful death recovery were not excluded from taxation under section 104(a)(2). The Court found that the punitive damages in question satisfied the first prong of the test because they had been received in an "ordinary suit for personal injuries."24 Moving to the second prong, the Court observed that punitive damages could be excluded from taxation under section 104(a)(2) only if they were received "on account of" the personal injuries. Noting that the "phrase `on account of' does not unambiguously define itself," the Court proceeded to examine it.25
The Court began its analysis by setting forth two competing interpretations of the phrase "on account of":
On one linguistic interpretation of those words, that of petitioners, they require no more than a "but-for" connection between "any" damages and a lawsuit for personal injuries. They would thereby bring virtually all personal injury lawsuit damages within the scope of the provision, since: "but for the personal injury, there would be no lawsuit, and but for the lawsuit, there would be no damages." On the Government's alternative interpretation, however, those words impose a stronger causal connection, making the provision applicable only to those personal injury lawsuit damages that were awarded by reason of, or because of, the personal injuries. To put the matter more specifically, they would make the section inapplicable to punitive damages, where those damages "`are not compensation for injury [but] [i]nstead ... are private fines levied by civil juries to punish reprehensible conduct and to deter its future occurrence.' "26
The Court then adopted the Government's proposed interpretation,...
To continue reading
Request your trial
-
Murphy v. Internal Revenue Service
...rights.'" Id. at 337, 115 S.Ct. 2159. The taxpayer has the same burden under the statute as amended. See, e.g., Chamberlain v. United States, 401 F.3d 335, 341 (5th Cir.2005). Murphy contends § 104(a)(2), even as amended, excludes her particular award from gross income. First, she asserts h......
-
In re Linerboard Antitrust Litigation
...F.Supp.2d 266, 359 (N.D.N.Y.2001) (noting prejudgment interest "takes into account ... lost opportunity cost"); Chamberlain v. United States, 401 F.3d 335, 344 (5th Cir.2005) (noting "prejudgment interest is more naturally associated with ... opportunity cost"); Borden, Inc. v. F.E.R.C., 85......
-
Murphy v. I.R.S.
...rights.'" Id. at 337, 115 S.Ct. 2159. The taxpayer has the same burden under the statute as amended. See, e.g., Chamberlain v. United States, 401 F.3d 335, 341 (5th Cir.2005). Murphy contends § 104(a)(2), even as amended, excludes her particular award from gross income. First, she asserts h......
-
P v. United States
...injuries or [physical] sickness." Schleier, 515 U.S. at 337; see also Green, 507 F.3d at 867; Chamberlain ex rel. Chamberlain v. United States, 401 F.3d 335, 341 (5th Cir. 2005). There is no dispute that the Settlement Agreement "satisfies the requirement that the underlying cause of action......