Gerstenbluth v. Credit Suisse Sec. (Usa) LLC

• Decision Date: 27 August 2013
• Docket Number: Docket No. 12–4125–cv.
• Citation: 728 F.3d 139
• Parties: Chester GERSTENBLUTH, Plaintiff–Appellant, v. CREDIT SUISSE SECURITIES (USA) LLC, INTERNAL REVENUE SERVICE, Defendants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

728 F.3d 139

Chester GERSTENBLUTH, Plaintiff–Appellant,

v.CREDIT SUISSE SECURITIES (USA) LLC, INTERNAL REVENUE SERVICE, Defendants–Appellees.

Docket No. 12–4125–cv.

United States Court of Appeals,Second Circuit.

Argued: June 13, 2013.

Decided: Aug. 27, 2013.

Chester Gerstenbluth, pro se, Plainview, NY

Stephen M. Kramarsky (Angela L. Harris, on the brief), Dewey Pegno & Kramarsky LLP, New York, NY, for Defendant–Appellee Credit Suisse Securities (USA) LLC.

Kenneth W. Rosenberg (Kathryn Keneally, Assistant Attorney General, Michael J. Haungs, Attorney, on the brief), Attorney, Tax Division, United States Department of Justice, Washington, D.C. (Loretta E. Lynch, United States Attorney for the Eastern District of New York, Brooklyn, NY, of counsel), for Defendant–Appellee Internal Revenue Service.

Before: POOLER, LOHIER, and CARNEY, Circuit Judges.

SUSAN L. CARNEY, Circuit Judge:

Plaintiff–Appellant Chester Gerstenbluth, appearing pro se on appeal as he did in the District Court, agreed to withdraw his complaint under the Age Discrimination in Employment Act (“ADEA”) against his former employer, Credit Suisse Securities (USA) LLC (“Credit Suisse”), in exchange for a lump sum payment of $250,000. The principal question on appeal is whether, under the Federal Insurance Contributions Act (“FICA”), these settlement proceeds are fairly characterized as “wages” received by Gerstenbluth “with respect to employment,” and are thus subject to FICA taxes. See26 U.S.C. § 3101(a); id. § 3101(b)(1); id. § 3121. We conclude that the proceeds are FICA wages. We therefore affirm the District Court's rejection of Gerstenbluth's refund claim and award of summary judgment to the Internal Revenue Service (“IRS”). We further affirm the District Court's dismissal of Gerstenbluth's refund claim against Credit Suisse.

BACKGROUND

We draw the following narrative primarily from the statement of material facts submitted by the IRS in support of its motion for summary judgment, and from documents submitted as exhibits to that filing. Gerstenbluth has not disputed any of these factual assertions or the authenticity of the related exhibits.

After Credit Suisse terminated his employment with the company, Gerstenbluth filed a complaint with the United States Equal Employment Opportunity Commission (“EEOC”), asserting that Credit Suisse discriminated against him on the basis of his age when it effected the termination.¹ Credit Suisse offered to settle, and in August 2009 the parties executed a related Settlement Agreement and Release (“Agreement” or “Settlement Agreement”). The Agreement provided that, in consideration of a payment to him of $250,000, “minus applicable taxes and deductions,” Agreement ¶ 1, and subject to the EEOC's agreement to dismiss his charge, Gerstenbluth agreed to withdraw his EEOC complaint and to release all claims against Credit Suisse, id. ¶ 4. Under the Agreement, Credit Suisse expressly “retain[ed] the right to deduct and withhold from any payments to Gerstenbluth all sums that it may be required to withhold pursuant to applicable tax withholding laws or regulations.” Id. ¶ 3. Aside from these generic phrases, however, the Agreement did not address the character of the $250,000 payment for purposes of federal income or employment taxation, or further describe the nature of the payment.²

Credit Suisse issued Gerstenbluth an IRS Form W–2, Wage and Tax Statement, for tax year 2009. On the Form W–2, the company included the settlement payment amount as part of Gerstenbluth's “[w]ages, tips, other comp[ensation]” and reported that it had withheld FICA taxes totaling $4,217.66 from the settlement sum.³

Gerstenbluth took issue with this characterization of the payment and disputed the company's withholding of FICA taxes. He unsuccessfully sought to recover the withheld FICA taxes from Credit Suisse and the IRS, to which (we presume) Credit Suisse had forwarded the withheld taxes. Having failed to obtain a refund through the prescribed administrative processes, Gerstenbluth filed suit in the United States District Court for the Eastern District of New York.

Credit Suisse moved to dismiss the complaint for failure to state a claim, and the IRS moved for summary judgment. The District Court (Joanna Seybert, Judge ) granted both motions. With respect to Credit Suisse, the court dismissed the complaint on the ground that Gerstenbluth did “not have a private right of action under the U.S. tax laws.” Gerstenbluth v. Credit Suisse Secs. (USA) LLC, No. 11–CV–2525, 2012 WL 4511632, at *2 (E.D.N.Y. Sept. 28, 2012). With respect to the IRS's motion, the court noted that “[m]oney paid to settle employment discrimination claims can be ‘wages,’ at least where the money represents back pay or front pay.” Id. Emphasizing Credit Suisse's treatment of the award as “wages” on Form W–2 and the Settlement Agreement's provision that the award would be paid “minus applicable taxes and deductions,” the court concluded that the payment “constituted ‘wages' and was thus subject to FICA tax withholding.” Id. (internal quotation marks omitted). Gerstenbluth was therefore not entitled to the claimed refund. Id. He timely appealed.⁴

DISCUSSION

Because Gerstenbluth proceeded pro se both in the District Court and on appeal, “we read his papers liberally and interpret them to raise the strongest arguments that they suggest.” Brownell v. Krom, 446 F.3d 305, 310 (2d Cir.2006) (internal quotation marks omitted). We review de novo the District Court's grant of summary judgment in favor of the IRS, drawing in Gerstenbluth's favor all factual inferences grounded in the record. See Steel Inst. of N.Y. v. City of New York, 716 F.3d 31, 33 (2d Cir.2013). “Summary judgment is appropriate when there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Id. (internal quotation marks omitted). Because no relevant facts are disputed in this case, we focus on whether the settlement proceeds constitute “wages” under 26 U.S.C. § 3121(a), a mixed question of law and fact that we review de novo. See Roberts v. Royal Atl. Corp., 542 F.3d 363, 367 (2d Cir.2008).

1. The Tax Treatment of Settlement Awards

As is familiar to most taxpaying wage-earners, the FICA tax consists of two components: a tax to fund “[o]ld age, survivors, and disability insurance” (commonly known as Social Security) and a tax to fund “hospital insurance,” (commonly known as Medicare). 26 U.S.C. § 3101(a); id. § 3101(b)(1); see United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 205, 121 S.Ct. 1433, 149 L.Ed.2d 401 (2001). Both components of the tax are imposed only on “wages” received by a taxpayer “with respect to employment.” 26 U.S.C. § 3101(a); id. § 3101(b)(1). The Code defines “wages” for this purpose as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” ⁵Id. § 3121(a). The definition of wages has been broadly construed: “Remuneration for employment ... constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them.” Treas. Reg. § 31.3121(a)–1(i). FICA places an obligation on the employer to collect the related taxes and transmit them to the government. 26 U.S.C. § 3102(a).

Gerstenbluth freely acknowledges that a settlement payment of back or front pay would be wages subject to FICA taxes.⁶ He contends, however, that the settlement payment he received is neither front pay nor back pay nor any form of “wages.” Rather, he characterizes the sum as something different: a “payment to drop the Appellant's complaint of Age Discrimination against Credit Suisse.” Appellant's Br. at 7. In support of his view, he asserts that he had already received a “significant severance package”; at no time during settlement negotiations “was there any mention of back or forward pay”; the settlement amount “was not in any way linked” to his “former salary or length of tenure”; and Credit Suisse did not treat the payment as triggering related pension plan contributions. Id. at 9–10. He also points to IRS Publication 4345, id. at 8, which in its one-page 2010 format advised that a settlement for “unlawful discrimination” “should be reported as ‘Other Income’ ” on IRS Form 1040, the United States Individual Tax Return.⁷ Supplemental App. (“Supp.App.”) 13. Although his position may have some initial plausibility, Gerstenbluth oversimplifies the correct inquiry, and his argument is ultimately unpersuasive.

To determine the correct tax treatment of a settlement payment, we look first at the nature of the claim that led to the settlement, together with the remedies available under the law on which the claim giving rise to the settlement is based, to ascertain what the payment fairly represents. Stated differently, in seeking to classify a settlement payment or damages award for tax purposes, we ask, “In lieu of what were the damages awarded?” Milenbach v. Comm'r, 318 F.3d 924, 932 (9th Cir.2003) (emphasis added and internal quotation marks omitted); accord Espinoza v. Comm'r, 636 F.3d 747, 750 (5th Cir.2011); Francisco v. United States, 267 F.3d 303, 319 (3d Cir.2001); Delaney v. Comm'r, 99 F.3d 20, 23–24 (1st Cir.1996).

This approach finds support in precedent from both the Supreme Court and our Court. In United States v. Burke, 504 U.S. 229, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992), superseded by statute on other grounds, Small Business Job Protection Act of 1996, Pub.L. 104–188, § 1605, 110 Stat. 1755, 1838 (codified at 26 U.S.C. § 104(a)(2)), for example, the Supreme Court addressed whether a settlement payment to end a Title VII gender discrimination claim constituted damages for “personal injuries,” which would have been exempt from the federal income tax at the time. Id. at 233–34, 112 S.Ct. 1867. Because, under Title VII, ...