Herbert v. US

• Decision Date: 01 June 1987
• Docket Number: No. 86 Civ. 5377 (CLB).,86 Civ. 5377 (CLB).
• Citation: 662 F. Supp. 573
• Parties: Carol M. HERBERT and Henry W. Herbert, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

662 F. Supp. 573

Carol M. HERBERT and Henry W. Herbert, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 86 Civ. 5377 (CLB).

United States District Court, S.D. New York.

June 1, 1987.

Henry W. Herbert, New York City, pro se.

Edward Ferguson, Asst. U.S. Atty., New York City, for defendant.

MEMORANDUM AND ORDER

BRIEANT, Chief Judge.

This is an action against the Government filed by plaintiffs Carol M. Herbert and Henry W. Herbert, cosignatories of a joint tax return, seeking a refund of $12,752.70¹ in federal income tax, claimed to have been wrongfully assessed and collected from plaintiffs by the Internal Revenue Service ("IRS") for the tax year 1982. Jurisdiction arises under 28 U.S.C. § 1346(a)(1).

The parties have filed motions for summary judgment, which were fully submitted to this Court for a decision on April 6, 1987, upon receipt of a letter from the plaintiffs reporting the decision of the Honorable Barron P. McCune in a parallel case filed in the Western District of Pennsylvania, Sutherland v. United States, 664 F.Supp. 207 (W.D.Pa.1987). For the reasons stated below, the taxpayers' motion is granted and the Government's motion is denied. The Court finds that there is no genuine issue of disputed fact which requires a trial.

These undisputed facts are as follows. Plaintiff Henry W. Herbert ("taxpayer") was actively employed by the New York Central Railroad, Penn Central Railroad and Consolidated Rail Corporation ("Conrail"), successively, from November 27, 1957 through December 31, 1978. In January 1979, taxpayer was "deprived of employment" with Conrail within the meaning of Title V of the Regional Rail Reorganization Act, 45 U.S.C. § 722 et seq., as a result of which he was entitled to job and wage protection benefits provided for in Title V, until age 65.

Upon the enactment of the Northeast Rail Service Act ("NERSA") in 1981, in which Congress repealed Title V and replaced it with Title VII, 45 U.S.C. § 797 et seq., former Conrail employees who had been entitled to benefits under Title V became eligible for benefits under the new Title VII. The United States Railroad Retirement Board ("Board"), the agency charged with administering Title VII, gave former Conrail employees eligible for Title VII benefits two options: (1) a lump sum termination allowance, or (2) alternative benefits in lieu of termination of employment.

Mr. Herbert elected the first option. On or about June 8, 1982, the Board approved Mr. Herbert's election to accept a lump sum termination allowance in the amount of $20,000. Deductions were made from this sum in an amount equal to the premiums for health coverage provided for the period January through May 1982, which premiums had been paid by the Board on behalf of taxpayer. On or about June 14, 1982, Mr. Herbert received from the United States Department of the Treasury (which provides the funding under NERSA), a check in the amount of $19,275.31, which was approved by the Railroad Retirement Board. This represented the balance of the statutory termination allowance due him. No taxes were withheld by the United States from the termination allowance so awarded.

In a joint tax return for the 1982 tax year, signed by Henry W. and Carol M. Herbert, plaintiffs failed to declare this lump sum payment as taxable income.

By letter dated December 1, 1983 to George A. Delaney, Director of the Bureau of Unemployment and Sickness Insurance of the Railroad Retirement Board, and apparently in response to his query, Richard H. Manfreda, Chief of the Individual Income Tax Branch of the Internal Revenue Service, provided information regarding the federal income tax consequences of benefits paid pursuant to section 701 of Title VII of the Regional Rail Reorganization Act of 1973, 45 U.S.C. § 797 et seq. (Exhibit 1 of Plaintiffs' 3(g) Statement). The IRS agent therein found no clear and specific statement of the intended federal income tax consequences in the statute or its legislative history, and reasoned that: "the language of § 705(b) was merely intended to deal with the manner in which the payments and other benefits of Title VII would be treated for purposes of the Railroad Retirement Act and the Railroad Unemployment Insurance Act." Therefore, he concluded, all benefits and payments made pursuant to Articles III and IV of the benefit schedules are includible in the gross income of a recipient-employee, with the exception of contributions made by the Railroad Retirement Board on behalf of an employee to provide for continuing health and welfare protection prior to the employee's election to take a lump-sum termination payment. The letter regarded the lump sum payments as "wages" for purposes of federal income tax withholding, and instructed the Railroad Retirement Board henceforth to cause the withholding of federal income tax from the payments made by the United States Treasury pursuant to this statute.

On July 15, 1985, the Director of the Internal Revenue Service, North Atlantic Region, notified plaintiffs that, because they had not on April 15, 1983 declared as taxable income the "RRB wages" of $19,275.31 or the "medical adjustment" of $724.69 as required "per the IRS ruling of December 1, 1983", plaintiffs' owed the IRS an additional $12,445.60, representing a tax deficiency of $9,471.00 plus interest from April 15, 1983 in the amount of $2,974.60 (Exh. A to Complaint). Mr. Herbert responded to this notice on August 12, 1985 by requesting a hearing before a member of the Director's appeals office (Exh. B to Complaint). Plaintiffs allege that no response to this letter was ever received by them, and Defendant denies knowledge or information as to this particular matter (Answer para. 13). The Court notes that this minor factual dispute is neither relevant nor material to the determination of the question of law presented.

On or about October 16, 1985, plaintiffs paid the claimed deficiency with interest, and on December 10, 1985 filed with the IRS a claim for refund of the sums paid under protest. In April 1986, the IRS assessed, and plaintiffs paid, additional interest in the amount of $307.10, bringing the total amount paid by plaintiffs to $12,752.70 (Exhibit E to Complaint).

The plaintiffs filed the Complaint commencing this action for a refund on July 9, 1986. Plaintiffs contend, and Defendant admits (Answer para. 17), that over six months have elapsed since they mailed to the Director a claim for refund and, therefore, the jurisdictional requirements of 26 U.S.C. § 7422(a) have been met. By reason of the execution and signing by the plaintiffs of the consent and waiver on October 16, 1985, and the payment by plaintiffs of the outstanding deficiency with interest, the time within which to bring this action commenced on October 16, 1985, and no notice for a disallowance was required to be mailed by the Director to the plaintiffs (Complaint para. 16; Answer para. 18). The Court holds at the outset that all procedural requisites have indeed been met, and this case is properly brought in this Court.

The question presented by these cross motions for summary judgment is solely one of law: whether the lump sum separation allowance paid to a former Conrail employee pursuant to 45 U.S.C. § 797 is subject to federal income tax.

The separation allowance was paid to Mr. Herbert pursuant to Section 797d(b) of Title VII, "Protection of Employees", 45 U.S.C., which provides that:

"(b) Treatment of benefits

Any benefits received by an employee under an agreement entered into pursuant to section 797 of this title and any termination allowance received under section 797a of this title shall be considered compensation solely for purposes of —

(1) the Railroad Retirement Act of 1974 (45 U.S.C. 321, et seq.); and

(2) determining the compensation received by such employee in any base year under the Railroad Unemployment Insurance Act (45 U.S.C. 351, et seq.)" (emphasis added).

The dispute as framed by the parties is essentially a question of interpretation of this statute in conjunction with the Internal Revenue Code and the cases decided thereunder.

The Internal Revenue Code, 26 U.S.C. § 61(a), defines "gross income" as "all income from whatever source derived." In Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430, 75 S.Ct. 473, 476, 99 L.Ed. 483 (1955), the Supreme Court recognized that it has long "given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted." Thus, a payment must constitute gross income absent a specific exemption evidencing "clear congressional intent" to the contrary. Id. at 431, 75 S.Ct. at 477.

Plaintiffs claim that the termination allowance received by taxpayer in 1982 is and was exempt from taxes by reason of the plain language of the statute that provides for such payments, 45 U.S.C. § 797d(b), in its specification that the benefits be considered "compensation" only for the purposes enumerated therein, of which income taxes is not one. However, the Government contends that this provision by its terms does not manifest any clear and specific Congressional intent to exempt the payments from federal income tax because it contains no reference to the words "income" or "tax", and expresses "no congressional intent whatever" on the tax consequences of such payments.

Plaintiffs cite the Treasury Regulations which accompany this definitional provision of the Internal Revenue Code, § 1.61-1 and § 1.61-2(a), and which expressly recognize that gross income and specifically, termination or severance pay, can be "excluded by law" from being considered taxable income to the recipients. They argue, and this Court agrees, that this is precisely what Congress has done with respect to this termination allowance by enacting § 797d.

Stating that no such exclusion has been demonstrated, the Government instead likens the lump-sum separation allowance to severance pay, a form...