Mayberry v. U.S., No. 97-4165

• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)
• Writing for the Court: Before BEAM and MURPHY; MURPHY
• Citation: 151 F.3d 855
• Parties: -5511, 98-2 USTC P 50,632, 22 Employee Benefits Cas. 1513, Pens. Plan Guide (CCH) P 23945U Michael A. MAYBERRY; Patricia J. Mayberry, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Docket Number: No. 97-4165
• Decision Date: 10 August 1998

Page 855

151 F.3d 855 82 A.F.T.R.2d 98-5511, 98-2 USTC P 50,632,
22 Employee Benefits Cas. 1513,
Pens. Plan Guide (CCH) P 23945U Michael A. MAYBERRY; Patricia J. Mayberry, Plaintiffs-Appellees,
v.
UNITED STATES of America, Defendant-Appellant. No. 97-4165. United States Court of Appeals,
Eighth Circuit. Submitted May 11, 1998.
Decided Aug. 10, 1998.

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Kenneth W. Rosenberg, Dept. of Justice, Washington, DC, argued (Kenneth L. Greene, Dept. of Justice, Washington, DC, on the brief), for Appellant.

Stephen L. Hester, Washington, DC, argued (K. Peter Schmidt, Washington, DC, on the brief), for Appellees.

Before BEAM and MURPHY, Circuit Judges, and MELLOY, ¹ District Judge.

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MURPHY, Circuit Judge.

This case involves the proper characterization for federal tax purposes of a settlement award received by Michael A. Mayberry in a class action brought under § 502(a)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1132(a)(3). Mayberry and his wife, Patricia J. Mayberry, sued the government to obtain a refund of income and employment taxes paid on the award. They claim that the settlement was structured in such a way that the award received by each class member was neither income nor wages. The government appeals from the summary judgment granted to the Mayberrys. We reverse.

This case, and several other refund cases like it, grew out of consolidated class action suits filed by more than five thousand former employees of Continental Can Company under § 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3). The class alleged that the company interfered with the attainment of members' pension rights in violation of § 510 of ERISA, 29 U.S.C. § 1140, by laying them off before those rights vested in order to reduce its projected pension liabilities. Partial summary judgment on liability was granted in favor of the class, and a special master was appointed to assist in the settlement of damages issues or to recommend a procedure to expedite their resolution. See McLendon v. Continental Group, Inc., 660 F.Supp. 1553, 1564-65 (D.N.J.1987); McLendon v. Continental Group, Inc., 749 F.Supp. 582, 612 (D.N.J.1989), aff'd 908 F.2d 1171 (3d Cir.1990). The special master proposed a $415 million settlement fund and a way of allocating it to class members, and the settlement plan was approved by the district court in July 1992.

The plan of distribution provided that all class members would receive a basic award from the settlement fund and most would receive an earnings impairment additur as well. Although the special master did not have the authority to determine the ultimate tax consequences of the settlement award, he described the award as compensation for mental anguish, dignitary harm, and loss in earnings capacity. See Report of the Special Master Regarding Various Tax Issues Attending the Settlement at 5, 10-14, 20-24 (citing United States v. Burke, 504 U.S. 229, 234-37, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992)). In order to avoid complicated and time consuming determination of losses suffered by each class member, the special master developed generally applicable formulas to compute each component of the award. Since the vesting of pension rights at Continental Can depended on a combination of age and years of service, the basic award was calculated by using these two factors as a "crude proxy for ... nonpecuniary loss suffered by class members." The level of the award increased the closer the individual pension rights were to vesting at the time of layoff. Id. at 25-26. The earnings impairment additur was computed by multiplying the basic award by a compensation loss ratio of "expected post-Continental Can earnings to pre-layoff earnings." Id. at 26.

Michael Mayberry, who was laid off after more than six years with Continental Can, received a settlement award of $21,467. The award included $16,145 for his basic award and $5,322 for his earnings impairment additur. The settlement agreement provided that tax would be withheld on all awards in order to protect Continental Can from any risk of withholding tax liability. Mayberry and his wife reported the award on their 1992 joint federal income tax return and then filed a claim with the Internal Revenue Service (IRS) for a refund of the income and employment taxes paid on the award, which came to a total of $5781.07 plus interest. The IRS disallowed the claim, and the Mayberrys filed this refund action.

The Mayberrys claim the award is neither taxable as income nor as wages. They say it was excludable from gross income under Internal Revenue Code (IRC) § 104(a)(2), 26 U.S.C. § 104(a)(2). That section excludes from income any "damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness." They also say it did not constitute "wages" subject to Federal Insurance Contribution Act (FICA) taxes, see 26 U.S.C. §§ 3101(a), 3121(a). The parties filed cross-motions for summary judgment and stipulated that all relevant

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facts were undisputed. Summary judgment was granted to the Mayberrys on both tax issues.

The government appeals, arguing that the settlement award is not the type of compensatory damage excludable under IRC § 104(a)(2) because only equitable relief is available under ERISA § 502(a)(3), see Mertens v. Hewitt Associates, 508 U.S. 248, 255-63, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993), and that it is also taxable under FICA because it fits within that statute's broad definition of "wages." The Mayberrys respond that Mertens was decided after the class action was settled and it should therefore not be applied here. They argue that characterization of the award in the settlement agreement should be given effect and it should be considered as compensation for personal injuries.

A grant of summary judgment is reviewed de novo, see Ringier Am., Inc. v. Land O'Lakes, Inc., 106 F.3d 825, 827 (8th Cir.1997), and is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law, see Fed.R.Civ.P. 56(c). The relevant facts here are not contested, and the proper tax characterization of Mayberry's award presents only questions of law.

Two other circuit courts have previously addressed the taxability of the Continental Can settlement awards, with conflicting results. A split Fifth Circuit panel decided in favor of the taxpayers after focusing on the parties' intent at the time of the settlement and the interests in finality and predictability of taxation. See Dotson v. United States, 87 F.3d 682, 686-88 (5th Cir.1996). In Hemelt v. United States, 122 F.3d 204 (4th Cir.1997), the Fourth Circuit focused instead on the nature of the underlying action that had been settled and on the Supreme Court decision in Mertens. Since the underlying...