Rivera v. Baker West, Inc.

• Decision Date: 13 December 2005
• Docket Number: No. 03-17261.,03-17261.
• Citation: 430 F.3d 1253
• Parties: Jack A. RIVERA, Plaintiff-Appellant, v. BAKER WEST, INC., an Arizona corporation; Baker Concrete Construction, Inc., an Arizona corporation, dba Baker Concrete, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

430 F.3d 1253

Jack A. RIVERA, Plaintiff-Appellant, v. BAKER WEST, INC., an Arizona corporation; Baker Concrete Construction, Inc., an Arizona corporation, dba Baker Concrete, Inc., Defendants-Appellees.

No. 03-17261.

United States Court of Appeals, Ninth Circuit.

Submitted June 17, 2005.^*

Filed December 13, 2005.

COPYRIGHT MATERIAL OMITTED

William D. Howell III, The Howell Law Firm, LLC, Phoenix, AZ, for the plaintiff-appellant.

Rebecca Winterscheidt, and Leslie A. Smith, Snell & Wilmer, LLP, Phoenix, AZ, for the defendants-appellees.

Appeal from the United States District Court for the District of Arizona; Earl H. Carroll, District Judge, Presiding. D.C. No. CV-02-02082-EHC.

Before: TALLMAN, BYBEE, and BEA, Circuit Judges.

BYBEE, Circuit Judge:

Jack Rivera ("Rivera") appeals the district court's order dismissing his suit against Baker Concrete Construction, Inc. ("Baker"). Rivera argues that Baker improperly withheld approximately fifteen thousand dollars in state and federal employment taxes from a check that was paid to settle his claim for unlawful workplace discrimination and wrongful termination and, therefore, that the district court erred in dismissing the suit on the basis of the settlement. Rivera's argument is twofold: first, he argues that the settlement proceeds paid by Baker were intended to reimburse Rivera for personal physical injuries and should therefore be excluded from his gross income under 26 U.S.C. § 104(a)(2); second, he argues that, even assuming the settlement proceeds represent lost wages, an award of back pay under Title VII is not subject to income tax withholding.

We conclude that the district court did not clearly err in finding that the settlement proceeds were not intended to compensate for personal physical injuries, but instead represented lost wages. Because the district court reasonably classified the settlement proceeds as back pay, the district court properly held that Rivera's settlement proceeds were subject to withholding. Accordingly, we affirm the district court's decision granting Baker's motion to dismiss.

I. FACTS AND PROCEEDINGS

In October 2002, Rivera filed a complaint against Baker alleging: (1) that he was subjected to a hostile work environment as a result of discrimination based on his race and national origin; (2) that he was wrongfully terminated by Baker; and (3) that his employer subsequently provided unfavorable references, all in violation of 42 U.S.C. §§ 1981, 1983, 1985, 2000e-2, 2000e-3, and 2000e-16. The parties appeared before a magistrate judge for a settlement conference and reached a settlement agreement. The executed settlement agreement provided in Section I that Baker would pay Rivera the "sum of forty thousand ($40,000) less all lawfully required withholdings."

Baker issued Rivera a check in the amount of $25,140, retaining $14,860 as a "lawfully required withholding." The amount withheld included $10,000 in federal income tax, $3,060 in Federal Insurance Contributions Act ("FICA") tax, and $1,800 in state income tax. Baker then filed a motion for dismissal with prejudice because Rivera cashed the $25,140 settlement check but had not dismissed his claims. Rivera opposed the motion, arguing that the settlement terms were not defined in the agreement, and that taxes should not have been withheld. Rivera requested that the district court enforce the settlement agreement and order Baker to pay the withheld settlement amount to Rivera.

The district court granted Baker's motion to dismiss. The court found that "the settlement agreement signed by both parties [did] not state whether the settlement sum constituted payment for lost wages or back pay." It also found that Rivera's complaint did not allege damages for "emotional distress or any other exception that would warrant classifying the settlement sum as anything other than an award for back pay." The court concluded that the settlement sum was lawfully classified as taxable wages and that Baker's withholding was proper. This appeal followed.

II. STANDARD OF REVIEW

We review questions of law de novo, Milenbach v. Commissioner, 318 F.3d 924, 930 (9th Cir.2003), and review findings of fact for clear error, Nunes v. Mueller, 350 F.3d 1045, 1051 (9th Cir.2003).

III. DISCUSSION

Rivera makes two principal arguments: (1) that the district court improperly found that the parties' settlement represented back pay because it encompassed emotional distress and mental anguish allegedly suffered as a result of Baker's conduct, and (2) that the district court erred because lost wages recovered under Title VII are not subject to income tax withholding. We discuss each in turn.

A. Classifying Settlement Proceeds As Income

The Internal Revenue Code defines gross income as "all income from whatever source derived," except as excluded by other provisions of the Code. 26 U.S.C. § 61(a) (2004). Section 104(a)(2) provides an exclusion for "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness." 26 U.S.C. § 104(a)(2) (emphasis added); see also 26 C.F.R. § 1.104-1(c). The italicized language of the § 104(a)(2) exclusion was added by the Small Business Job Protection Act of 1996, Pub.L. 104-188, § 1605, to make clear that only damages for physical injuries or sickness, and not damages for emotional distress, were excluded from the definition of income. See Mayberry v. United States, 151 F.3d 855, 858 n. 2 (8th Cir.1998). Prior to this amendment, the Supreme Court held in Commissioner v. Schleier, that a taxpayer seeking to exclude money damages from income bears the burden of proving that the exclusion applies. 515 U.S. 323, 336-37, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995) (involving damages received pursuant to a settlement agreement disposing of the plaintiff's age discrimination claims).

The 1996 amendment does not affect the allocation of the burden of proof discussed in Schleier. Thus, in order for Rivera's settlement proceeds to qualify for a § 104(a)(2) exclusion, he must show that: (1) "the underlying cause of action giving rise to the recovery is `based upon tort or tort type rights;'" and (2) "the damages were received `on account of personal [physical] injuries or [physical] sickness.'" Schleier, 515 U.S. at 337, 115 S.Ct. 2159 (alteration added) (quoting United States v. Burke, 504 U.S. 229, 234, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992)). We conclude that Rivera has failed to satisfy the second requirement, that the damages were received on account of personal physical injuries or physical sickness, and therefore do not address whether the post-1991 version of Title VII contemplates the types of damages associated with tort and tort-like claims.¹

The second requirement of the Schleier test "can only be satisfied if there is `a direct causal link' between the damages and the personal injuries sustained." Banaitis v. Comm'r, 340 F.3d 1074, 1080 (9th Cir.2003) (quoting Fabry v. Comm'r, 223 F.3d 1261, 1270 (11th Cir.2000)), abrogated on other grounds by Comm'r v. Banks, 543 U.S. 426, 125 S.Ct. 826, 160 L.Ed.2d 859 (2005). Thus, when damages are paid through a settlement agreement, we will look first to the underlying agreement to determine whether it expressly states that the damages compensate for "personal physical injuries or physical sickness" under § 104(a)(2). See Pipitone v. United States, 180 F.3d 859, 863 (7th Cir.1999). If the agreement lacks express language specifying the purpose of the compensation, we will then examine the intent of the payor. See id. at 864; Kurowski v. Comm'r, 917 F.2d 1033, 1036 (7th Cir.1990); Knuckles v. Comm'r, 349 F.2d 610, 613 (10th Cir.1965). The payor's intent can be "based on all the facts and circumstances of the case, including the complaint that was filed and the details surrounding the litigation." Allum v. Comm'r, 90 T.C.M. (CCH) 74 (2005).

First, examining the agreement, we conclude that it does not expressly state that the damages paid to Rivera compensate for personal physical injuries or physical illness. Rivera has not pointed to a provision of the agreement that supports a contrary conclusion. The settlement agreement lists only the amount of the settlement and does not describe the specific personal injuries Rivera may have sustained. To the extent the agreement betrays the nature of the settlement, the inferences run against Rivera or, at best, are neutral. The settlement agreement provides that Baker would pay Rivera $40,000 "less all lawfully required holdings." If, as Rivera claims, the $40,000 compensated him for personal physical injuries or physical sickness, the phrase "less all lawfully required holdings" is not only surplusage, but quite misleading. The phrase, however, is entirely consistent with Baker's insistence that the settlement compensated Rivera for back pay. Nevertheless, the settlement agreement falls short of expressly identifying the nature of the injuries redressed.

Second, if there is no express evidence of the parties' intent in the settlement agreement, we look to the intent of the payor. Baker argues that it did not intend the award to compensate for personal physical injuries or physical sickness, but rather to dispose of Rivera's back pay claim. Once again, Baker points to language in the settlement agreement stating that Baker would pay Rivera $40,000 "less all lawfully required withholdings." This language is the best (and only) available evidence of the payor's intent, save Rivera's bare assertion to the contrary, and it suggests that Baker intended some or all of the damages to constitute back pay. For reasons stated above, the inference is a reasonable one: "[t]he withholding of taxes is a significant factor suggesting the employer intended a payment to constitute severance pay." Pipitone, 180 F.3d at 864 (citing Nagourney v. Comm'r, 57 T.C.M. (CCH)...