Downey v. Comm'r of Internal Revenue, Docket No. 11120-89.

• Court: United States Tax Court
• Citation: 97 T.C. 150,97 T.C. No. 10,56 Fair Empl.Prac.Cas. (BNA) 897,57 Empl. Prac. Dec. P 41019
• Docket Number: Docket No. 11120-89.
• Parties: BURNS. P. DOWNEY AND MARJORIE DOWNEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Decision Date: 31 July 1991

56 Fair Empl.Prac.Cas. (BNA) 897
57 Empl. Prac. Dec. P 41,019
97 T.C. 150
97 T.C. No. 10

BURNS. P. DOWNEY AND MARJORIE DOWNEY, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11120-89.

United States Tax Court.

Filed July 31, 1991.

P, an airline pilot, sued his former employer under the Age Discrimination in Employment Act of 1967 (ADEA) claiming that certain actions of his employer constituted unlawful age discrimination in violation of the ADEA and that such actions were a willful violation of the ADEA. P received the amount of $120,000 in settlement of his ADEA claim. One-half of the settlement amount was allocated to “nonliquidated damages,” and one-half to “liquidated damages.” HELD under sec. 104(a)(2), an ADEA claim is a tort or tort-like claim to redress a personal injury. HELD FURTHER, we overrule in part our decision in Rickel v. Commissioner, 92 T.C. 510 (1989), affd. in part and revd. in part900 F.2d 655 (3d Cir. 1990), and we overrule our decision in Pistillo v. Commissioner, T.C. Memo. 1989-329, revd. 912 F.2d 145 (6th Cir. 1990). HELD FURTHER, nonliquidated damages, or back pay, under the ADEA compensate the victim for pecuniary losses arising from age discrimination. HELD FURTHER, liquidated damages under the ADEA compensate such victim for certain nonpecuniary losses arising from age discrimination. HELD FURTHER, petitioners, accordingly, are entitled under sec. 104(a)(2) to exclude from gross income the nonliquidated and the liquidated damages received in settlement of the ADEA claim.

[97 T.C. 151]

Steven E. Reick, for the petitioners.

Marjory A. Gilbert, James F. Hanley, Jr., and Jan E. Lamartine, for the respondent.

OPINION HALPERN, Judge:^*

Respondent has determined a deficiency of $43,237 ¹ in petitioners' Federal income tax for 1985, together with additions to tax under sections 6653(a) and 6661 (since conceded by respondent). This case requires us to determine the taxability of an amount received in settlement of a suit brought under the Age Discrimination in Employment Act of 1967, as amended (the ADEA). Pub. L. 90-202, 81 Stat. 602-608 ( 29 U.S.C. secs. 621- 634). In their petition, petitioners assign error to respondent's determination that the portion of such amount received and categorized as liquidated damages constitutes gross income, subject to tax. By an amendment to their petition, petitioners assign error to their inclusion in gross income of the portion of the settlement amount categorized as nonliquidated damages. The question for our consideration is whether all or any portion of the settlement amount is excludable from gross income under section 104(a)(2). Section 104(a)(2) allows for the exclusion of “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.”

The parties have submitted this case fully stipulated, and the facts so stipulated are found accordingly. By this reference, the stipulation of facts and the attached exhibits are incorporated herein.

[97 T.C. 152]

Background

Petitioners are husband and wife. At the time of filing their petition, petitioners resided in Oak Park, Illinois. When used in the singular, the term “petitioner” is intended to refer to petitioner husband, Burns P. Downey.

The Age Discrimination in Employment Act

As a preliminary matter, we will describe relevant aspects of the ADEA. The ADEA broadly prohibits arbitrary discrimination in the workplace based on age. Trans World Airlines. Inc. v. Thurston, 469 U.S. 111, 120 (1985). See 29 U.S.C. sec. 623(a). ² The preamble to the ADEA declares that its purpose is “to promote employment of older persons based on their ability rather than age [and] to prohibit arbitrary age discrimination in employment.” 29 U.S.C. sec. 621(b). Section 4(a)(1) of the ADEA proscribes differential treatment of workers between the ages of 40 and 70 “with respect to * * * compensation, terms, conditions, or privileges of employment.” 29 U.S.C. secs. 623(a)(1), 631(a).

Under the FLSA, employers who violate minimum wage or maximum hour laws are liable to the affected employees in the amount of their unpaid minimum wages, or their unpaid overtime compensation, and in an additional equal amount as liquidated damages. 29 U.S.C. sec. 216(b). Regarding liquidated damages, however, if the employer shows “that the act or omission giving rise to such action [for unpaid minimum wages or unpaid overtime compensation under the FLSA] was in good faith and that he had reasonable grounds

[97 T.C. 153]

for believing that his act or omission” did not violate the FLSA, the court may refuse to award liquidated damages. 29 U.S.C. sec. 260.

In contrast, section 7(b) of the ADEA provides that a prevailing plaintiff is entitled to liquidated damages “only in cases of willful violations.” 29 U.S.C. sec. 626(b). Of course, as under the FLSA, a plaintiff under the ADEA can recover other than liquidated damages. Section 7(b) empowers the courts “to grant such legal or equitable relief as may be appropriate to effectuate the purposes of this chapter, including without limitation judgments compelling employment, reinstatement or promotion, or enforcing the liability for amounts deemed to be unpaid minimum wages or unpaid overtime compensation under this section.” 29 U.S.C. sec. 626(b). In contrast to “liquidated damages” awarded under section 7(b), we will refer to amounts received pursuant to the quoted grant of authority as “nonliquidated damages.”

Petitioner's Employment History With United Air Lines, Inc.

Petitioner was born on September 19, 1921. In 1945, petitioner was employed by United Air Lines, Inc. (United), and, by early 1981, petitioner was a captain, flying Boeing 747 jets. Generally, United's flight deck crews included two pilots (i.e., captain and first officer) and a second officer.

To continue flying as a captain, petitioner was required to submit to two Federal Aviation Administration (FAA) physicals a year and to hold a specific FAA medical certificate. On September 1, 1981, the FAA revoked petitioner's medical certificate, and United placed petitioner on sick leave. Pursuant to United's sick leave policy, petitioner, utilizing accumulated sick leave, continued to draw his full salary.

On September 19, 1981, petitioner turned 60 years old. FAA rules barred persons over the age of 60 from serving as captains or first officers, but did not preclude such persons from serving as second officers (the Age 60 Rule). See 14 C.F.R. sec. 121.383(c). United, however, had a somewhat contrary policy. United prohibited persons over the age of 60 who had served as a captain from holding any position in the flight deck crew, including that of a second officer.

[97 T.C. 154]

Therefore, on October 1, 1981, the commencement of the first month after petitioner turned 60, United changed petitioner's status from sick leave to retired.

As of October 1, 1981, petitioner ceased earning his captain's salary of $10,182 per month and began receiving $5,454 a month in retirement benefits. Upon placement in retirement status, petitioner “forfeited” the balance of his accumulated sick leave. Petitioner calculated that, if United had reassigned him to a position as a second officer, rather than retired him, he would have been entitled to approximately $89,794 of additional sick pay.

Petitioner's Suit Against United Air Lines, Inc.

In June 1984, petitioner filed a complaint under the ADEA against United. The complaint was filed in the U.S. District Court, Northern District of Illinois, Eastern Division. B. Price Downey v. United Air Lines, Inc., Docket No. 84 C 5534. Petitioner's complaint alleged that United's refusal to allow petitioner to serve as a second officer after petitioner turned 60 years old constituted unlawful age discrimination and that United's actions were a willful violation of the ADEA. Petitioner's complaint mentions no other grounds for bringing the lawsuit. As relief, petitioner sought in his complaint, inter alia, reinstatement, retroactive seniority rights, employee benefits as if petitioner's employment had not been interrupted, back pay plus interest, and liquidated damages.

In September 1984, petitioner regained his FAA medical certificate. A month later, in October 1984, petitioner applied to be reinstated on a flight deck crew in a position other than captain or first officer. United rejected petitioner's application based on its policy that persons over 60 years of age who had served as a captain were prohibited from holding any position on the flight deck crew, including the position of second officer.

Later in 1984, petitioner's civil action against United was joined with two other ADEA cases also in the U.S. District Court, Northern District of Illinois, Eastern Division. Monroe v. United Air Lines, Inc. (Docket No. 79 C 360); Higman v. United Air Lines, Inc. (Docket No. 79 C 1572). Monroe and Higman were the lead cases in a class action

[97 T.C. 155]

suit filed against United prior to the filing of petitioner's complaint and were consolidated themselves for the purpose of trial. Before petitioner filed his 1984 complaint against United, the trial court entered judgment on jury verdicts in favor of the plaintiffs and against United in Monroe and Higman. On appeal, the U.S. Court of Appeals for the Seventh Circuit reversed and remanded the class action suit on the basis of erroneous jury instructions. Monroe v. United Air Lines, Inc., 736 F.2d 394, 409 (7th Cir. 1984). The parties have stipulated that petitioner's 1984 complaint was filed after the trial court's judgment but before the Seventh Circuit's reversal and remand.

Settlement of ADEA Suit

In late 1985, petitioner and United entered into a settlement agreement (the Settlement Agreement). The parties have stipulated that petitioner and United reached a settlement after the Seventh Circuit's reversal and remand in Monroe and Higman but before the...