Reese v. U.S., 93-5199

• Decision Date: 16 May 1994
• Docket Number: No. 93-5199,93-5199
• Citation: 24 F.3d 228
• Parties: 64 Fair Empl.Prac.Cas. (BNA) 1264, 73 A.F.T.R.2d 94-2009, 62 USLW 2730, 94-1 USTC P 50,232 Elizabeth A. REESE, Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 228

24 F.3d 228

64 Fair Empl.Prac.Cas. (BNA) 1264, 73

A.F.T.R.2d 94-2009,

62 USLW 2730, 94-1 USTC P 50,232

Elizabeth A. REESE, Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.

No. 93-5199.

United States Court of Appeals, Federal Circuit.

May 16, 1994.

David Shane Smith, Spotts, Smith & Fain, P.C., Richmond, VA, submitted for plaintiff-appellant. With him on the brief was John B. Nicholson.

Edward Perelmuter, Atty., Dept. of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were Michael L. Paup, Acting Asst. Atty. Gen., Gary R. Allen and Kenneth L. Greene, Attys.

Before NIES ^*, LOURIE, and RADER, Circuit Judges.

LOURIE, Circuit Judge.

Elizabeth A. Reese appeals from a decision of the United States Court of Federal Claims denying her motion for summary judgment and granting the United States' cross-motion for summary judgment. Reese v. United States, 28 Fed.Cl. 702 (1993). Because punitive damages received in settlement of civil litigation are not excludable from a taxpayer's "gross income" subject to federal income tax under section 104(a)(2) of the Internal Revenue Code, 26 U.S.C. Sec. 104(a)(2) (1987), we affirm.

BACKGROUND

The facts of this case are undisputed. On March 11, 1985, Reese filed suit against her former employers in the United States District Court for the District of Columbia, alleging that she had been forced to terminate her employment because of gender discrimination and sexual harassment by her employers (1) in violation of the District of Columbia Human Rights Act (DCHRA), see D.C.Code Ann. Sec. 1-2501 (1981); (2) in breach of her employment contract; and (3) amounting to an intentional infliction of emotional distress. Reese v. Hayden, Civ. No. 85-0827 (D.D.C. filed Mar. 11, 1985). Reese requested, inter alia, compensatory and punitive damages and won a jury verdict awarding her $150,000 in compensatory damages and $100,000 in punitive damages. Following the trial, the defendants filed motions for judgment notwithstanding the verdict.

The parties later entered into a "Release, Settlement and Indemnity Agreement," according to which Reese agreed to dismiss her suit against certain defendants, and the remaining defendants agreed to withdraw their motions for JNOV. In addition, the remaining defendants agreed to pay Reese the $250,000 in total damages awarded pursuant to the verdict, plus costs and attorneys' fees of $239,437.01. The sum of $489,437.01 was paid to Reese on January 28, 1987.

Reese filed her 1987 federal income tax return, including in gross income the $100,000 in punitive damages she received under the settlement agreement. On December 11, 1989, she filed an amended return for the calendar year 1987, claiming a refund of $32,580, and asserting that punitive damages were excludable from gross income under section 104(a)(2) of the Internal Revenue Code, which excludes from gross income "any damages received ... on account of personal injuries or sickness." ¹ Reese's Reese then filed suit in the Court of Federal Claims seeking a refund of $32,580 plus court costs, expenses, interest, and attorneys' fees. The parties filed cross-motions for summary judgment and the court granted summary judgment in favor of the United States. The court concluded that section 104(a)(2) is ambiguous. Reese, 28 Fed.Cl. at 706. Adhering to the general tenet that the language "gross income" is to be construed broadly and exemptions to gross income are to be construed narrowly, the court then concluded that the exclusion of section 104(a)(2) does not encompass punitive damages because the title and subject matter of section 104 are limited to payments received as "compensation" for injuries or sickness. It stated that such an interpretation is supported by the legislative history and the contemporaneous events relating to the adoption of the predecessor statute to section 104. Id. at 706-07. Reese now appeals from that judgment. We have jurisdiction over the appeal pursuant to 28 U.S.C. Sec. 1295(a)(3) (1988).

claim for refund was disallowed by the Internal Revenue Service (IRS).

DISCUSSION

We review a decision of the Court of Federal Claims to grant summary judgment de novo. Quaker State Oil Ref. Corp. v. United States, 994 F.2d 824, 826 (Fed.Cir.1993). There being no dispute as to any material fact, our review of the decision turns on the proper interpretation of the Internal Revenue Code, a question of law for our de novo determination. See id. at 826-27.

The question of law presented to us is whether punitive damages are received "on account of personal injuries" and therefore excludable from gross income under section 104(a)(2) of the Code. To resolve this question of statutory interpretation, we look first to the language of the statute. Martel v. Department of Transp., Federal Aviation Admin., 735 F.2d 504, 507 n. 6 (Fed.Cir.), cert. denied sub nom. Schapansky v. Department of Transp., 469 U.S. 1018, 105 S.Ct. 432, 83 L.Ed.2d 358 (1984).

The Code provides that gross income includes "all income from whatever source derived." 26 U.S.C. Sec. 61(a) (1987). Section 104(a) excludes from gross income "compensation for injuries and sickness" and provides as follows:

Sec. 104. Compensation for injuries and sickness.

(a) In general.--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include--

* * * * *

(2) 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....

26 U.S.C. Sec. 104 (1987) (emphasis added). Reese contends that the statute by its plain meaning excludes from gross income all damages received in a personal injury suit, including punitive damages, because such damages are received "on account of" personal injuries. We disagree.

The language "on account of" is not free of ambiguity; rather, it is susceptible of at least two conflicting interpretations. See Reese, 28 Fed.Cl. at 706; Commissioner v. Miller, 914 F.2d 586 (4th Cir.1990). Reese interprets the language "on account of" to describe a causal relationship between damages and injury according to which damages are received "on account of" a personal injury whenever a showing of personal injury is a legal prerequisite for the award of those damages. In other words, any damages ultimately received in a case involving personal injury are damages received "on account of" that personal injury. However, the government urges a tighter interpretation, one which defines a causal relationship according to which damages are received "on account of" personal injuries only when the injury in Both interpretations are plausible. We therefore disagree with Reese that the question of her tax liability is readily settled by the plain meaning of the statute. Consequently, we must "look not only to the particular statutory language, but to the design of the statute as a whole and to its object and policy." Crandon v. United States, 494 U.S. 152, 158, 110 S.Ct. 997, 1001, 108 L.Ed.2d 132 (1990).

and of itself justifies such damages. Under the government's interpretation, punitive damages are not encompassed by the exclusion, because those damages are received, not because of a personal injury, but in large part "on account of" a defendant's egregious conduct and the jury's desire to punish and deter such conduct.

Section 104 is found in Part III of Subchapter B of the Code, entitled "Items specifically excluded from gross income." Section 104 is entitled "Compensation for injuries or sickness." 26 U.S.C. Sec. 104 (emphasis added). "Compensatory damages" are commonly understood to mean damages "such as will compensate the injured party for the injury sustained, and nothing more; such as will simply make good or replace the loss caused by the wrong or injury." Black's Law Dictionary 390 (6th ed. 1990). See Immigration and Naturalization Serv. v. National Ctr. for Immigrants, 502 U.S. 183, ----, 112 S.Ct. 551, 556, 116 L.Ed.2d 546 (1992) ("the title of a statute or section can aid in resolving an ambiguity in the legislation's text").

Consistent with this common meaning of "compensatory damages," section 104's enumerated categories encompass only the replacement of losses resulting from injury or sickness. Section 104(a)(1) exempts amounts received under workmen's compensation acts; section 104(a)(3) exempts amounts received through accident or health insurance; section 104(a)(4) exempts amounts received as a pension, annuity, or similar allowance for personal injuries or sickness; and section 104(a)(5) exempts amounts received as disability income. Reese's proposed interpretation of section 104(a)(2) as reaching noncompensatory payments is therefore inconsistent with the title of section 104 and with the express provisions of sections 104(a)(1) and (a)(3)-(a)(5). See King v. Saint Vincent's Hosp., 502 U.S. 215 , ----, 112 S.Ct. 570, 574, 116 L.Ed.2d 578 (1991) ("[T]he meaning of statutory language, plain or not, depends on context.").

Furthermore, an abiding principle of federal tax law is that, absent an enumerated exception, gross income means all income from whatever source derived. See 26 U.S.C. Sec. 61(a). "The income taxed is described in sweeping terms and should be broadly construed in accordance with an obvious purpose to tax income comprehensively." Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477 (1949). "[E]xemptions, on the other hand, are specifically stated and should be construed with restraint in the light of the same policy." Id. Thus, all realized accessions to wealth are presumed to be taxable income, unless a taxpayer can demonstrate that an acquisition is specifically exempted. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430, 75 S.Ct. 473, 476, 99 L.Ed. 483 (1955) (it is the...