Redfield v. Insurance Co. of North America
| Decision Date | 06 August 1991 |
| Docket Number | No. 88-6300,88-6300 |
| Parties | 56 Fair Empl.Prac.Cas. 977, 57 Empl. Prac. Dec. P 40,945, 68 A.F.T.R.2d 91-5316, 91-2 USTC P 50,385, 120 Lab.Cas. P 56,779, Unempl.Ins.Rep. CCH 16208A Fremont G. REDFIELD, Plaintiff-Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John C. McCarthy, John C. McCarthy and Associates, Claremont, Cal., for plaintiff-appellant.
Gregory B. Tobin, Philadelphia, Pa., for defendant-appellee.
Appeal from the United States District Court for the Central District of California.
Before D.W. NELSON, BRUNETTI and O'SCANNLAIN, Circuit Judges.
Appellant's petition for rehearing is GRANTED.
The memorandum disposition filed September 24, 1990 is withdrawn. A new disposition will be filed in its stead.
This appeal from the district court's order granting relief from judgment pursuant to Federal Rule of Civil Procedure 60(b)(5) in an age discrimination case presents, surprisingly, a question of federal income tax law.
Fremont Redfield brought suit in state court against his former employer, Insurance Company of North America ("ICNA"), alleging violations of the Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. Secs. 621-634, and the California Fair Employment and Housing Act ("FEHA"), Cal.Gov't Code Secs. 12900-12996, wrongful discharge (breach of employment contract), breach of the implied duty of good faith and fair dealing, and intentional infliction of emotional distress. After removal to federal court, the district court concluded that ICNA had discriminated against Redfield on the basis of age, in violation of both the ADEA and FEHA, and that ICNA had breached an implied employment contract and that contract's covenant of good faith and fair dealing. Accordingly, the district court awarded Redfield $189,500 in "economic damages," $25,000 in "emotional distress damages," and $75,000 in "punitive damages." The judgment was subsequently upheld on appeal by this court. See Redfield v. Insurance Co. of North America, 833 F.2d 1017 (9th Cir.1987) (unpublished disposition).
Pursuant to the district court's order awarding damages to Redfield, ICNA's attorney forwarded five checks to Redfield's attorney in a letter dated March 1, 1988. The first check was for $142,535.50, representing the net amount remaining from the $189,500 "economic damages" award after the sum of $46,964.50 was withheld for federal income tax, Federal Insurance Contributions Act ("FICA") tax, and California state income tax. Two checks were for $75,000 and $25,000, representing punitive damages and emotional distress damages, respectively; ICNA did not withhold taxes from these payments of damages. The remaining two checks were for attorney fees awarded to Redfield in the district court and this court.
Because taxes were withheld from the "economic damages" payment, Redfield refused to acknowledge satisfaction of judgment. ICNA then moved in the district court for relief from final judgment pursuant to Fed.R.Civ.P. 60(b)(5) on the basis that ICNA had paid all the monies due Redfield, and therefore the district court's judgment had been satisfied. In an order entered July 21, 1988, the district court granted ICNA's motion, ruling that ICNA properly withheld federal and state income taxes and FICA taxes.
Redfield now appeals from the district court's order. We review the district court's grant of a Rule 60(b)(5) motion under an abuse of discretion standard. See Dias v. Bank of Hawaii, 732 F.2d 1401, 1402 (9th Cir.1984). A district court abuses its discretion by making a clear error of law. United States v. Washington, 935 F.2d 1059, 1061 (9th Cir.1991).
Redfield argues that tax withholding was improper because the entire economic damages award, as compensation for personal injuries sustained in what is essentially a tort action, is exempt from taxation.
For the purposes of calculating federal income tax, a taxpayer's gross income is defined as "all income from whatever source derived," except as excluded elsewhere in the Internal Revenue Code's Subtitle A ("Income Taxes"). See I.R.C. Sec. 61(a) (1988). One specific statutory exclusion from gross income, however, is "the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness." Id. Sec. 104(a)(2). "Damages received" refers to payments received through prosecution, or the threat of prosecution, of a legal action "based upon tort or tort type rights." 26 C.F.R. Sec. 1.104-1(c) (1990).
The relevant inquiry, then, is "whether the [award] was received on account of personal or non-personal injuries, not whether the damages compensate the taxpayer for economic losses." Byrne v. Commissioner, 883 F.2d 211, 214 (3d Cir.1989) (). If the "economic damages" award obtained by Redfield was received for personal injuries, then the award would not be taxable under the federal income tax scheme.
In the past year, two circuits have considered the question posed by this case: whether ADEA damages represent payments for personal injuries excludable from income under section 104(a)(2). Each has concluded that the damages are entirely excludable, even though the award (or some part of it) might be based on lost wages. See Pistillo v. Commissioner, 912 F.2d 145 (6th Cir.1990); Rickel v. Commissioner, 900 F.2d 655 (3d Cir.1990). We consider whether this circuit should adopt the view taken by the Third and Sixth Circuits.
In Roemer v. Commissioner, 716 F.2d 693 (9th Cir.1983), we rejected the Tax Court's longstanding attempt to distinguish between physical and nonphysical personal injuries for the purposes of determining excludability of personal injury damages. See id. at 697. Instead, we examined the nature of the claim underlying the award to determine whether damages received were excludable. Id. Roemer involved a state law tort suit for defamation, which, we concluded, was a "personal injury" under the applicable state law, thus rendering the entire damages award excludable. Id. at 700.
Following our decision in Roemer, the Third, Sixth, and Tenth Circuits and the full Tax Court (by a 15-1 vote) also concluded that courts must look to the nature of the claim in order to determine whether damages received by a taxpayer were paid on account of personal injuries. See Wulf v. City of Wichita, 883 F.2d 842, 872-73 (10th Cir.1989) (); Bent v. Commissioner, 835 F.2d 67, 70 (3d Cir.1987) (); Threlkeld v. Commissioner, 87 T.C. 1294 (1986) (en banc) (defamation damages excludable), aff'd, 848 F.2d 81 (6th Cir.1988); see also Byrne, 883 F.2d at 214-16 (). Several such opinions have made clear that the presence of "back pay" or "lost wages" in the calculation of damages is irrelevant to their taxability where the nature of the claim is tort-like, rather than purely contractual. See, e.g., Burke v. United States, 929 F.2d 1119, 1122-24 (6th Cir.1991) (); Bent, 835 F.2d at 70 (); Metzger v. Commissioner, 88 T.C. 834 (1987) (), aff'd, 845 F.2d 1013 (3d Cir.1988) (unpublished disposition).
Rickel and Pistillo are the first cases to apply Roemer and its progeny to age discrimination claims. In Rickel, the taxpayer (Rickel), after demotion and later termination, filed an ADEA action against his employer, praying for reinstatement, back wages and other lost compensation, liquidated damages, and attorney fees. See 900 F.2d at 656-57. After trial, and while the jury deliberated, the parties reached a settlement, contingent upon the jury's answers to particular interrogatories. Id. at 657. Ultimately, the settlement amount was determined to be $180,000, which was not allocated among Rickel's various prayers for relief. Id. The Commissioner asserted that the settlement monies received during the relevant tax year ($105,000) were taxable. Id.
In Pistillo, the terminated taxpayer (Pistillo) brought an age discrimination suit under the ADEA, various civil rights statutes, and two amendments to the United States Constitution. Pistillo requested injunctive relief, reinstatement, back pay, and attorney fees. See 912 F.2d at 146-47. At the end of trial, the district court instructed the jury that it could award Pistillo back pay, liquidated damages, and compensatory damages. Id. at 147. The jury awarded Pistillo $55,000 in compensatory damages, and the district court awarded him $22,432.83 in attorney fees. While the judgment was on appeal, the parties reached a settlement whereby the employer paid Pistillo $81,562.58, including $22,706.18 for attorney fees and $856.40 for court reporter fees. The Commissioner contended that the $58,000 received by Pistillo in the settlement was taxable. Id.
In each case, the appellate court concluded that the settlement figure was excludable from the taxpayer's income because the underlying claim, age discrimination, was tort-like. See Pistillo, 912 F.2d at 149-50; Rickel, 900 F.2d at 662-64. As the court stated in Rickel,
the duty of an employer to refrain from discriminating against employees on the basis of their age arises by operation of a statute. Society...
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