Pipitone v. U.S., 97 C 4751.

• Citation: 17 F.Supp.2d 793
• Decision Date: 24 August 1998
• Docket Number: No. 97 C 4751.,97 C 4751.
• Parties: Andrew PIPITONE and Joanne Pipitone, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Illinois

17 F.Supp.2d 793

Andrew PIPITONE and Joanne Pipitone, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 97 C 4751.

United States District Court, N.D. Illinois, Eastern Division.

August 24, 1998.

Andrew Pipitone, Chicago, IL, pro se.

Douglas W. Snoeyenbos, United States Department of Justice, Washington, DC, for U.S.

OPINION and ORDER

NORGLE, District Judge.

Before the court are cross motions for summary judgment. For the following reasons, Defendant's motion (Doc. No. 8) is granted and Plaintiffs' motion (Doc. No. 13) is denied.

I. BACKGROUND

This is a tax refund action. From December 1981 until January 1995, Plaintiff Andrew Pipitone ("Pipitone") was an at-will employee in the claims department of CNA Insurance Companies ("CNA"). His title was "Vice-President Claims Legal Services." On January 13, 1995, CNA terminated Pipitone; he was 49 years old at the time.

In connection with his termination, Pipitone and CNA entered into an agreement entitled "General Release in Full and Settlement Agreement" ("the Agreement"). Dated January 13, 1995, the Agreement provides, in relevant part:

Whereas your employment with the Company will be ending January 13, 1995;

Whereas you and the Company now desire to effect a final settlement of all matters concerning the terms and conditions of the employment relationship and the termination of that employment relationship without the concession of any liability or fault of any kind or nature on the part of either party;

NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, you and the Company agree as follows:

1. The Company agrees to pay you ... fifty-two weeks, or $95,000, less applicable Federal, State and Local deductions. The Company will further provide outplacement services and continued coverage under the Company's Employee Health Plan ... through January 31, 1996, if you are enrolled in them now and prepay all employee-rate contribution premiums for each of the selected coverages. You acknowledge and agree that the Company does not normally pay this amount of compensation nor provide continued health or life insurance benefits to terminated employees with your length of service with the Company, and that the payment to you of such amounts and the providing of such insurance benefits constitutes an exception to normal Company policy.

2. With the exception of your eligibility for retirement benefits under the Company's retirement plan, you ... hereby release and forever discharge the Company to the fullest extent provided by law, from any and all matters, claims, actions, demands, causes of action, accounts, obligations or liabilities arising out of and relating to your employment of every nature and kind whatsoever in law or in equity that you now have or ever had from beginning of time to the date of the execution of this Agreement, whether now known or unknown, against the Company including, but not limited to, any right to severance or benefits other than that specified in the instant Agreement and any claims you have pursuant to the provisions of the Age Discrimination in Employment Act of 1967, as amended.

3. You ... covenant (a) not to file a claim with any local, state or federal government agency, department or commission alleging the Company as a respondent, defendant or participant, and (b) not to accept any relief which might be awarded to you by any such local, state or federal governmental agency, department or commission, and (c) not to sue the Company pursuant to any provision of the United States Code, including but not limited to the Age Discrimination in Employment Act of 1967, as amended, or any local or state law with respect to any and all matters ... released and discharged pursuant to the terms of this Agreement.

7. You acknowledge and agree that this Agreement constitutes the entire agreement and understanding between you and the Company. You further acknowledge and agree that in executing this Agreement, you have not relied on any promises or representations other than those set forth in this Agreement.

13. It is agreed and understood that the Company denies the existence of any liability to you and that the instant Agreement is intended solely to accomplish a settlement and is not to be construed as an admission of fault or liability of any kind or nature on the part of the Company.

(Pl.'s Rule 12(M) Stmt., at Ex. E.) Pipitone signed the Agreement on January 20, 1995.

In his 1995 income tax return Form 1040, Pipitone reported the $95,000 payment as income, and paid the corresponding tax. In August 1996, however, Pipitone filed an amended tax return Form 1040X, in which he claimed that his original return was in error.¹ In his amended return, Pipitone excluded the $95,000 from income and sought a refund of $32,511. Pipitone offered the following explanation in an attached Form 8275 "Disclosure Statement":

The Taxpayer has reduced his income ... by $95,000, representing the amount paid by the Taxpayer's employer to him upon termination of his employment. The Taxpayer, upon advice of counsel, believes that this payment is not taxable under Section 104 of the Internal Revenue Code because the payment was made in consideration to the Taxpayer for his release of his employer for any claim he might have against his employer for age discrimination and other potential tort claims.

(Pls.' Rule 12(M) Stmt., at Ex. A.).

In a letter dated October 25, 1996, the Internal Revenue Service rejected Pipitone's claim for a tax refund. The IRS stated that under the United States Supreme Court's decision in Commissioner v. Schleier, 515 U.S. 323, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995), "back pay and liquidated damages recovered through the settlement of a claim under the age discrimination in employment act are not excludible from gross income." (Pls'. Rule 12(M) Stmt., at Ex. B.) Pipitone then filed a written appeal with the IRS. (See id., at Ex. C.) In a letter dated March 14, 1997, the IRS again rejected Pipitone's claim based on the decision in Schleier. (See id., at Ex. D.) This suit followed. Each party now moves for summary judgment.

II. DISCUSSION

Rule 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). "If the non-moving party bears the burden of proof on an issue, that party may not rest on the pleadings and must instead show that there is a genuine issue of material fact." Sample v. Aldi, Inc., 61 F.3d 544, 546 (7th Cir.1995).

"A determination by the Commissioner is presumed to be correct and plaintiff bears the burden of proving that determination to be wrong." Roels v. United States, 928 F.Supp. 812, 814 (E.D.Wis.1996) (citing Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933)); see also First Chicago NBD Corp. v. Commissioner, 135 F.3d 457, 459 (7th Cir.1998) ("The Internal Revenue Service knows more about tax laws than the judges of the federal appellate courts do, and so it is natural for us to give some weight to its views about the meaning and application of those laws."); Pittman v. Commissioner, 100 F.3d 1308, 1313 (7th Cir. 1996).

"In a tax refund suit the taxpayer bears the burden of proving the amount he is entitled to recover." United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976) (citing Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 (1932)); see also Heublein, Inc. v. United States, 996 F.2d 1455, 1461 (2nd Cir.1993). In other words, Pipitone bears the burden of establishing that he overpaid his tax. See Lewis, 284 U.S. at 283, 52 S.Ct. 145 ("[T]he ultimate question presented for decision, upon a claim for refund, is whether the taxpayer has overpaid his tax."); see also Amax Coal Co. v. United States, 959 F.Supp. 990, 995 (S.D.Ind. 1996).

At issue here is whether the exclusion from income provided in § 104(a)(2) of the Internal Revenue Code ("the Code") entitles Pipitone to a tax refund. See 26 U.S.C. § 104(a)(2). Section 104(a)(2) states that "the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injury or sickness" shall not be included as gross income. "The rationale of the exemption is to free a taxpayer from liability for an amount received as compensation for a loss of that nature." Kurowski v. Commissioner, 917 F.2d 1033, 1036 (7th Cir.1990); see also Commissioner v. Miller, 914 F.2d 586, 590 (4th Cir.1990). Though § 104(a)(2) provides an exclusion from the broad reach of "gross income" as defined in § 61(a) of the Code,² the provision, like any other exclusion from income, "must be narrowly construed." Schleier, 515 U.S. 323, 115 S.Ct. at 2163; see also Kurowski, 917 F.2d at 1036.

The taxpayer bears the burden of proving the exclusion by showing: (1) "that the underlying cause of action giving rise to the recovery is based on tort or tort type rights"; and (2) that "the damages were received `on account of personal injuries or sickness.'" Commissioner v. Schleier, 515 U.S. 323, 115 S.Ct. 2159, 2167, 132 L.Ed.2d 294 (1995); see also Banks v. United States, 81 F.3d 874, 876 (9th Cir.1996). The first requirement "examines the legal basis of the claim for tort-like characteristics, focusing on the scope of remedies available under the statutory scheme." Dotson v. United States, 87 F.3d 682, 685 (5th Cir.1996); see also Brennan v. Commissioner, 74 T.C.M. (CCH) 69 (1997) ("Where damages are received pursuant to a settlement agreement, the nature of the claim that was the actual basis for settlement controls whether such damages are excludible under section 104(a)(2)."). The second requirement "tests whether the damages received were due to a...