Rice v. US

• Decision Date: 15 March 1993
• Docket Number: Civ. No. S-92-518 DFL/JFM.
• Citation: 834 F. Supp. 1241
• Court: U.S. District Court — Eastern District of California
• Parties: Michael L. RICE and Billie M. Rice, Plaintiffs, v. UNITED STATES of America, Defendant.

834 F. Supp. 1241

Michael L. RICE and Billie M. Rice, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. S-92-518 DFL/JFM.

United States District Court, E.D. California.

March 15, 1993.

G. Edward Diener, Burnett Burnett and Allen, San Jose, CA, for plaintiffs.

Henry C. Darmstadter, U.S. Dept. of Justice, Trial Atty., Tax Div., Washington, DC, for defendant.

MEMORANDUM OPINION AND ORDER

LEVI, District Judge.

Plaintiffs Michael and Billie Rice sue the federal government for a refund of $114,791 in income taxes paid in 1988 and 1989. The parties have cross-moved for summary judgment. The case presents the question of whether a damage award on a claim under the Age Discrimination in Employment Act ("ADEA") is taxable income.

I

Michael Rice sued his former employer, Stauffer Chemical Company, and two Stauffer supervisors for terminating his employment. Rice asserted claims under the ADEA, the California Fair Employment and Housing Act ("FEHA"), and the state law implied covenant of good faith and fair dealing. Before the trial, the court eliminated Rice's prayer for punitive damages. In 1985, the case was tried, and the jury returned a verdict for Rice, finding that Stauffer and the two individual defendants willfully discriminated against him because of his age. The jury awarded Rice $101,395.80 in general damages, $100,000.00 in ADEA liquidated damages, and $25,000.00 for pain and suffering under the FEHA.

The court allowed setoffs of $6,664.00 each (for severance pay Rice had received) against the general and liquidated damage awards, so that judgment was entered for Rice in the amount of $213,067.80 plus postjudgment interest. The court also awarded Rice $6,317.50 in costs and $87,290.18 in attorney's fees. In May 1988, Rice received $359,399.79 in satisfaction of the judgment, costs and fee award. Of this amount, $54,724.00 was postjudgment interest.

On appeal, the Ninth Circuit affirmed the jury verdict and the fee award, but reversed the district court's decision to strike the punitive damage prayer and remanded for a determination of the amount of punitive damages. In November 1989, the parties settled Rice's punitive damage claim for $425,000.00, of which $236,195.11 was paid to Rice, with the remainder paid directly to his attorneys.

In their 1988 federal income tax return, Michael and Billie Rice reported the following as income:

                General Damages                $101,396.00
                Offset for Severance Pay         (6,664.00)
                Court Costs                       6,318.00
                Attorneys' Fees                  87,290.00
                Postjudgment Interest            52,724.00
                                               ___________
                Total                          $241,064.00
                

The Rices also took a $100,403.00 itemized deduction as follows:

                Attorney's Fees         $ 94,044.00
                Attorney's Costs           5,953.00
                Other Legal Costs            406.00
                                        ___________
                Total                   $100,403.00
                

The Rices did not report as income the pain and suffering and liquidated damage awards.

Plaintiffs' 1988 return showed $50,680.00 in tax liability. The Rices timely paid this amount. In January 1992, plaintiffs claimed a refund of the entire amount. In March 1992, the Internal Revenue Service ("IRS") disallowed the refund claim.

Plaintiffs' 1989 return reported $236,195.00 in income attributable to the settlement of the punitive damage claim. The 1989 return showed $64,429 in tax liability. Again, the Rices timely paid the entire amount, and then claimed a refund. The refund claim was disallowed in March 1992.

Plaintiffs filed this action on April 1, 1992. They seek judicial review of the IRS disallowances of their refund claims. The Rices contend that the amounts in dispute were excludable from income under 26 U.S.C. § 104(a). That provision excludes from gross income "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." An IRS regulation provides that for purposes of § 104(a), "damages received" means "an amount received ... through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution." 26 C.F.R. § 1.104-1(c). Here, the dispute focuses on the tax treatment of three separate amounts: the ADEA damage awards (general and liquidated); postjudgment interest; and the punitive damage settlement.

II

Three circuits, including the Ninth, have held that ADEA damages are excludable from income under § 104(a). See Redfield v. Insurance Co. of North America, 940 F.2d 542 (9th Cir.1991); Pistillo v. C.I.R., 912 F.2d 145 (6th Cir.1990); Rickel v. C.I.R., 900 F.2d 655 (3rd Cir.1990). This would seem to resolve the issue. The government argues, however, that the Supreme Court's recent decision in U.S. v. Burke, ___ U.S. ___, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992), changes the analysis and compels a different result here.

Rickel, the first of the three circuit decisions, held that the § 104(a) inquiry must look to the nature of the claim rather than the consequences of the injury. Rickel, 900 F.2d at 661. Because an employer's duty not to discriminate on the basis of age arises by statute regardless of the employment contract, an age discrimination claim is "the assertion of a personal injury, tort type right." Id. at 662. In Pistillo, the Sixth Circuit relied heavily on Rickel, and concluded that while the lost wages sought by plaintiff were "a substantial nonpersonal consequence of his employer's age discrimination," this "did not transform the discrimination into a nonpersonal injury." Pistillo, 912 F.2d at 150. Finally, in Redfield, the Ninth Circuit followed Rickel and Pistillo, holding that "age discrimination damages are tort-type recoveries for personal injuries" and are therefore excludable from gross income. Redfield, 940 F.2d at 546-47.¹

Last year, in Burke, the Supreme Court was asked to decide whether a Title VII backpay claim settlement was excludable from income under § 104(a)(2). The Burke Court first noted that the analysis must focus "on the nature of the claim underlying the damages award"; thus, the claimants "must show that Title VII, the legal basis for their recovery of backpay, redresses a tort-like personal injury." Burke, ___ U.S. at ___, 112 S.Ct. at 1872. While the employment discrimination proscribed by Title VII "causes harm to individuals," this "does not automatically imply ... that there exists a tort-like `personal injury' for purposes of federal income tax law." Id. at ___, 112 S.Ct. at 1872-73.

Before the enactment of the Civil Rights Act of 1991,² Title VII limited available remedies to backpay, injunctions and other equitable relief. These remedies restore discrimination victims "to the wage and employment positions they would have occupied absent the lawful discrimination." Id. ___ U.S. at ___, 112 S.Ct. at 1873. Furthermore,

nothing in this remedial scheme purports to recompense a Title VII plaintiff for any of the other traditional harms associated with personal injury, such as pain and suffering, emotional distress, harm to reputation, or other consequential damages (e.g., a ruined credit rating).

Id. If "the relevant cause of action evidenced a tort-like conception of injury," discrimination could constitute a "personal injury" within the meaning of § 104(a). For instance, 42 U.S.C. § 1981 and Title VIII of the Civil Rights Act authorize compensatory and punitive damage awards and jury trials and therefore "sound basically in tort." Id. at ___, 112 S.Ct. at 1873-74. Title VII, by contrast, offers only "wages properly due" rather than the broad remedies available in these other antidiscrimination statutes. Thus, the Court concluded that Title VII, at least prior to recent amendment, does not redress a tort-like personal injury within the meaning of § 104(a). Id. at ___, 112 S.Ct. at 1874.

The dissent in Burke criticized the majority's focus on available remedies rather than "the nature of the statute and the type of claim brought under it." ___ U.S. at ___, 112 S.Ct. at 1879 (O'Connor, J., dissenting). The majority, responded that

the concept of a `tort' is inextricably bound up with remedies — specifically damages actions. Thus, we believe that consideration of the remedies available under Title VII is critical in determining `the nature of the statute' and the `type of claim' brought.

Burke, ___ U.S. at ___ n. 7, 112 S.Ct. at 1872 n. 7.

Burke does not overrule Rickel, Pistillo and Redfield. But Burke does hold that an analysis of the available remedies is critical to the § 104(a) determination. Like Title VII, the ADEA does not authorize compensatory and punitive damage awards by name. See Naton v. Bank of California, 649 F.2d 691, 698-99 (9th Cir.1981); Cancellier v. Federated Dept. Stores, 672 F.2d 1312, 1318 (9th Cir.1982). But the ADEA is not identical to Title VII prior to amendment by the Civil Rights Act of 1991. The ADEA provides for liquidated damages, in an amount equal to wages and benefits from the date of termination to the date of trial, in "cases of willful violations." 29 U.S.C. § 626(b); see Cassino v. Reichhold Chemicals, Inc., 817 F.2d 1338, 1348 (9th Cir.1987). The Act thus authorizes double damages. It also provides for jury trials. These are significant distinctions from pre-amendment Title VII.

Whether ADEA liquidated damages are best characterized as punitive or compensatory is the subject of spirited debate. No court, however, has adopted the government's proposal in this case that liquidated damages are a contract-like remedy for economic harm. See Defendant's Mem., 9:5-19 & n. 1. Instead, courts have characterized ADEA liquidated damages as compensatory, punitive or both. See Powers v. Grinnell Corp., 915 F.2d 34, 41-42 (1st Cir.1990) (liquidated damages serve compensatory and punitive functions); Fortino v. Quasar Co., 950 F.2d 389, 397-98 (...