Kightlinger v. Commissioner

• Court: U.S. Tax Court
• Writing for the Court: Armen
• Citation: Kightlinger v. Commissioner, 76 T.C.M. 611 (T.C. 1998)
• Decision Date: 05 October 1998
• Docket Number: Docket No. 13890-97.
• Parties: Clarence D. Kightlinger v. Commissioner.

76 T.C.M. 611

T.C. Memo. 1998-357

Clarence D. Kightlinger v. Commissioner.

Docket No. 13890-97.

United States Tax Court.

Filed October 5, 1998.

R. Wyatt Mick, Jr., for the petitioner.^* Timothy S. Sinnott, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

ARMEN, Special Trial Judge:

This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182.¹

Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1993 in the amount of $1,882, as well as an accuracy-related penalty under section 6662(a) for negligence or intentional disregard of rules or regulations in the amount of $376.

After a concession by respondent,² the only issue for decision is whether petitioner may exclude from gross income under section 104(a)(2) the settlement proceeds that he received during the year in issue. We hold that petitioner may not exclude such proceeds under section 104(a)(2).

FINDINGS OF FACT

Some of the facts have been stipulated, and they are so found. Petitioner resided in Mishawaka, Indiana, at the time that his petition was filed with the Court.

Petitioner was employed by Whitehall Laboratories, Inc. (Whitehall) in Elkhart, Indiana, from August 1986 through some time in 1990 or 1991. Whitehall Was a subsidiary of American Home Products Corp. (AHP). Wyeth-Ayerst Laboratories was a division of AHP.

While employed at Whitehall, petitioner was a member of a labor union named the Oil, Chemical and Atomic Workers International Union (the Union).

During the 1980's, AHP initiated a plan to relocate part of its operations to Guayama, Puerto Rico. As a result of this plan, AHP closed various plants operated by Whitehall and Wyeth-Ayerst, including the plant operated by Whitehall in Elkhart, by the end of 1991 or early 1992. The plant closings caused approximately 1,100 Whitehall and Wyeth-Ayerst employees to be laid off and eventually lose their jobs. Petitioner was one such individual.

In January 1991, the Union filed suit against AHP and various other entities and individuals in the United States District Court for the District of Puerto Rico (the District Court). During that same year, the Union determined that a class action should be brought against AMP and other defendants on behalf of the employees that were laid off. Consequently, in November 1991, the Union sent a notice entitled "Keep Whitehall Open" to the affected Whitehall employees. The notice stated that it had become appropriate to seek individual damages for the laid off members of the Union "under the RICO [Racketeer Influenced and Corrupt Organization] complaint". The notice provided further as follows:

the remedy that we would be asking for [is] compensation for losses in wages and benefits for some appropriate period of time but not less than the duration of the current contract * * *.

In February 1992, the Union, its local chapter, and several individuals (the Plaintiffs) filed a class action against AHP and various other individuals and entities (the Defendants) in the District Court. The class action complaint (the Complaint) stated in its preliminary statement that the Defendants:

did unlawfully and without justification violate federal Racketeering laws and intentionally interfere with the protected right of Plaintiffs, including the prospective economic advantages, enjoyed by the herein described class of former Elkhart * * * employees.

The Complaint identified several individual plaintiffs as typical class representatives. An example of a paragraph identifying an individual class member is as follows:

Defendants' decision to relocate and transfer jobs to Puerto Rico has caused [individual class representative] a great personal loss consisting of his being terminated in December, 1989. [Individual class representative] has since found no steady work and is forced to maintain temporary employment with no medical benefits. Defendants' actions, which provoked his unemployment, caused him great emotional distress, feelings of low self esteem and self worth. [Individual class representative] now earns much less and lost fringe benefits due to his being terminated by Defendants.

Other individual class representatives were similarly identified. The Complaint alleged factually in great detail that the Defendants, in the course of a scheme reasonably calculated to defraud the plaintiffs, to evade State and Federal taxes, and to avoid compliance with various other Federal and Puerto Rican laws, violated Federal racketeering laws and interfered with the Plaintiffs' economic advantage. All of the factual allegations revolved around the Defendants' wrongdoing in violations of the above-mentioned laws. There were no factual allegations regarding any personal injury.

The Plaintiffs based their claims on four counts consisting of two separate counts for RICO Act violations, one count for unlawful interference with prospective economic advantage, and one count for punitive damages. As required by the RICO Act, the two counts for RICO Act violations alleged injury to the Plaintiffs' business and property. Under the count for unlawful interference with prospective economic advantage, the Plaintiffs alleged that the Defendants' actions interfered with the rights of the Plaintiffs to "enjoy the fruits and advantages of their industries and efforts as employees". (Emphasis added.)³ Finally, by their count for punitive damages, the Plaintiffs claimed that the Defendants' negligent conduct caused "severe economic and financial harm as well as other damages" to the Plaintiffs. No mention was made of any physical or emotional injury under any of the four counts.

Pursuant to the class action, all AHP employees affected by AHP's relocation to Guayama, Puerto Rico, received a legal notice of class action. Petitioner was a member of this class action and received the above-mentioned notice. The notice of class action summarized the underlying class action as follows:

Plaintiffs allege in their complaint that Private Defendants, who in the course of a scheme reasonably calculated to deceive Plaintiffs and to evade state and federal taxes, to avoid compliance with various other federal and Commonwealth laws and regulations, and to relocate jobs from a state of the United States * * * to Guayama, Puerto Rico, and who acting in concert with its corporate officers and agents of the Commonwealth of Puerto Rico, did unlawfully and without justification violate federal Racketeering laws and intentionally interfere with the protected rights of Plaintiffs, including the prospective economic advantages, enjoyed by the herein described class of former * * * employees. Plaintiffs further allege that as a direct result of AHP's scheme to relocate its production facilities to Guayama, Puerto Rico to take advantage of tremendous tax savings, AHP caused workers to lose jobs, to be downgraded in their employment and/or to take early retirement, all of which caused substantial economic damages to members of the plaintiff class. Plaintiffs in this class action lawsuit seek to recover, on behalf of themselves and all other similarly situated workers, for the economic harm losses resulting from AHP's relocation to Puerto Rico, and the related events occurring thereafter. [Emphasis added.]

The notice of class action further stated:

If you want to participate in this class action lawsuit and thereby made a claim for economic loss resulting from AHP's alleged wrongful relocation of pharmaceutical production jobs to Guayama, Puerto Rico, you need do nothing. [Emphasis added.]

* * * * *

If you have any claims for damages arising out of AHP's relocation of production to Guayama, Puerto Rico that [are] not employment-related economic harms, these claims are not included in this class action. Examples of economic harm included in this class action are lost wages or lost salary, lost health care and/or retirement benefits.

In July 1992, the parties reached a settlement without trial. Thereupon, the parties filed a joint stipulation of settlement with the District Court. Pursuant to this joint stipulation of settlement, AHP agreed to pay $24 million in full satisfaction of all of the claims brought against it in the class action. The joint stipulation of settlement did not allocate the settlement proceeds for any particular claim. However, the proceeds were allocated among court-approved expenses, class counsel, the Union, and class members. The joint stipulation of settlement provided guidelines pursuant to which an independent trustee would determine the appropriate amount to compensate individual class members for their demonstrated employment-related economic harm. Pursuant to this stipulation, economic harm was to be measured based upon factors such as age, duration of employment with the company, salary history, and subsequent employment history, including the date of new employment and salary history. Noneconomic injury was not a factor to be considered in the independent trustee's allocation of the recovery to the class members.

Subsequently, class members, including petitioner, received a notice of proposed settlement and settlement hearing. The notice of proposed settlement reiterated that the lawsuit sought to recover for harm resulting from the Defendants' violation of the RICO Act and interference with the class members' prospective economic advantages as employees. The notice of proposed settlement then informed the class members regarding the method selected to compensate individual class members for their demonstrated economic harm arising from the loss of their employment. Individual class members were given the option to exclude themselves from the proposed settlement for any reason, including the possibility that their claim was more expansive than one for employment-related economic loss.

Individual class members were required to submit a proof of claim and release to the independent trustee to...