Schmitz v. C.I.R.

• Decision Date: 30 August 1994
• Docket Number: No. 93-70960,93-70960
• Citation: 34 F.3d 790
• Parties: 65 Fair Empl.Prac.Cas. (BNA) 1195, 65 Empl. Prac. Dec. P 43,238, 74 A.F.T.R.2d 94-6115, 63 USLW 2142, 94-2 USTC P 50,455 John A. SCHMITZ, Mary B. Schmitz, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 790

34 F.3d 790

65 Fair Empl.Prac.Cas. (BNA) 1195,

65 Empl. Prac. Dec. P 43,238, 74 A.F.T.R.2d 94-6115,

63 USLW 2142, 94-2 USTC P 50,455

John A. SCHMITZ, Mary B. Schmitz, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 93-70960.

United States Court of Appeals Ninth Circuit.

Argued and Submitted April 11, 1994.

Decided Aug. 30, 1994.

Gary R. Allen and Edward T. Perelmuter, Tax Div., U.S. Dept. of Justice, Washington, DC, for respondent-appellant.

Thomas F. Joyce, Bell, Boyd & Lloyd, Chicago, IL, for petitioners-appellees.

Appeal from a Decision of the United States Tax Court.

Before: GOODWIN, FERGUSON and TROTT, Circuit Judges.

Opinion by Judge GOODWIN; Concurrence by Judge TROTT.

GOODWIN, Circuit Judge:

The Commissioner appeals a tax court summary judgment granted in favor of taxpayers John and Mary Schmitz. The Commissioner argues that damages the Schmitzes received in settlement of an Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. Secs. 621 et seq., lawsuit are taxable income. The tax court held that the Schmitzes' ADEA settlement was excludable from gross income as "damages received ... on account of personal injuries or sickness." 26 U.S.C. Sec. 104(a)(2) (1988). We affirm.

I.

John Schmitz is a former employee of United Airlines, Inc. ("United") and a plaintiff in an ADEA class action against United. In 1986, United paid Schmitz $115,050 in settlement of his age discrimination claims. According to the settlement agreement, half of this payment was "back pay" and the other half was "ADEA liquidated damages."

The Schmitzes initially reported the back wages portion of the settlement as gross income received in 1986, excluding the liquidated damages. The Commissioner issued a notice of deficiency, alleging that the Schmitzes' entire award was taxable. The Schmitzes filed a tax court petition, arguing that the liquidated damages portion of the settlement was excludable from gross income under 26 U.S.C. Sec. 104(a)(2). After the Third Circuit decided Rickel v. Commissioner, 900 F.2d 655 (3d Cir.1990), the Schmitzes amended their petition, claiming that both the back pay and the liquidated damages were excludable.

The tax court held that the Schmitzes' entire settlement was excludable from gross income under Downey v. Commissioner, 97 T.C. 150, 1991 WL 140900 (1991), aff'd on reconsideration, 100 T.C. 634, 1993 WL 231740 (1993), reversed by, 33 F.3d 836 (7th Cir.1994). The Commissioner appealed.

II.

We review tax court decisions on the same basis as civil bench trials held in federal district court. Ball, Ball, & Brosamer, Inc. v. Commissioner, 964 F.2d 890, 891 (9th Cir.1992). Thus, we review the tax court's grant of summary judgment de novo to determine whether there are any genuine issues of material fact and whether the tax court correctly applied the law. Stevens v. Moore Business Forms, Inc., 18 F.3d 1443, 1446 (9th Cir.1994). Because this case presents no genuine issues of material fact, we agree that summary judgment was appropriate. We therefore review the tax court's legal conclusions de novo, Pacific First Fed. Savs. Bank v. Commissioner, 961 F.2d 800, 803 (9th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 209, 121 L.Ed.2d 150 (1992), construing the relevant exemptions narrowly in favor of taxation. United States v. Centennial Savs. Bank, 499 U.S. 573, 583-84, 111 S.Ct. 1512, 1518-19, 113 L.Ed.2d 608 (1991); United States v. Wells Fargo Bank, 485 U.S. 351, 354, 108 S.Ct. 1179, 1181-82, 99 L.Ed.2d 368 (1988).

III.

At the time of the Schmitzes' settlement, ¹ Sec. 104(a)(2) provided:

Sec. 104. Compensation for injuries or sickness

... [G]ross 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....

IRS regulations define "damages received" as "amount[s] 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. Sec. 1.104-1(c) (1993).

In Hawkins, we set forth a two-part test for determining whether damages received in a lawsuit are excludable under Sec. 104(a)(2) (1988). United States v. Hawkins, 30 F.3d 1077, 1083 (9th Cir.1994). We said a taxpayer must show both (1) that the underlying cause of action was tort-like within the meaning of United States v. Burke, --- U.S. ----, ----, 112 S.Ct. 1867, 1870, 119 L.Ed.2d 34 (1992), and 26 C.F.R. Sec. 1.104-1(c), and (2) that the damages were received "on account of" the taxpayer's personal injury. Id. We must therefore decide (A) whether ADEA creates a tort-like cause of action and (B) whether the Schmitzes' back pay and liquidated damages were received on account of their personal injuries.

A. ADEA Creates a "Tort-like" Cause of Action.

Until recently, the case law firmly established that ADEA lawsuits were "tort-like" within the meaning of Sec. 104(a)(2) and 26 C.F.R. Sec. 1.104-1(c). See Redfield v. Insurance Co. of North America, 940 F.2d 542 (9th Cir.1991); Pistillo v. Commissioner, 912 F.2d 145 (6th Cir.1990); Rickel v. Commissioner, 900 F.2d 655 (3d Cir.1990); Downey v. Commissioner, 97 T.C. 150, 1991 WL 140900 (1991). However, these cases relied on Threlkeld v. Commissioner, 87 T.C. 1294, 1308, 1986 WL 22061 (1986), aff'd 848 F.2d 81 (6th Cir.1988), which held that damages are excludable under Sec. 104(a)(2) if they were "received on account of any invasion of rights that an individual is granted by being a person in the sight of the law."

The Supreme Court recently changed this analysis, suggesting that even lawsuits which meet the Threlkeld test might not be tort-like for purposes of Sec. 104(a)(2) if they do not "evidence[ ] a tort-like conception of injury and remedy." United States v. Burke, --- U.S. ----, ----, 112 S.Ct. 1867, 1873, 119 L.Ed.2d 34 (1992). The Court, discussing damages awarded under the pre-1991 version of Title VII, agreed that "discrimination could constitute a 'personal injury' for purposes of Sec. 104(a)(2)." Id. However, the Court found that the pre-1991 version of Title VII was not tort-like because it did not provide for jury trials or "allow awards for compensatory or punitive damages," instead "limit[ing] available remedies to back pay, injunctions, and other equitable relief." Id. at ---- - ----, 112 S.Ct. at 1873-74. ² According to the Court, this unavailability of jury trials and failure to "recompense Title VII plaintiffs for anything beyond the wages properly due them" distinguish pre-1991 Title VII actions from ordinary tort actions and actions filed under other federal antidiscrimination statutes, such as Title VIII and 42 U.S.C. Sec. 1981. Id. at ----, 112 S.Ct. at 1874.

Most post-Burke courts addressing the issue have held that ADEA damages are still excludable, even under the Supreme Court's more restrictive test. See, e.g., Purcell v. Sequin State Bank & Trust Co., 999 F.2d 950, 960-61 (5th Cir.1993); Downey v. Commissioner, 100 T.C. 634, 637, 1993 WL 231740 (1993); Bennett v. United States, 30 Fed.Cl. 396 (1994); Rice v. United States, 834 F.Supp. 1241, 1243-45 (E.D.Cal.1993), appeal pending, No. 93-16272 (9th Cir. Sept. 9, 1993); cf. Abrams v. Lightolier, 841 F.Supp. 584, 596 (D.N.J.1994) (addressing a state law age discrimination award). ³ As these courts have noted, ADEA, unlike the pre-1991 version of Title VII, provides for jury trials. Bennett, 30 Fed.Cl. at 399. In addition, while ADEA does not provide for nonpecuniary compensatory damages or punitive damages "by name", Rice, 834 F.Supp. at 1244, it does provide for "liquidated damages" in cases of willful discrimination. 29 U.S.C. Sec. 626(b). These liquidated damages "serve to compensate the victim of age discrimination for certain nonpecuniary losses" and also serve "a deterrent or punitive purpose." Downey, 100 T.C. at 637; Rice, 834 F.Supp. at 1244. Thus, unlike the unamended version of Title VII, ADEA does not simply recompense plaintiffs for the wages properly due them.

The Commissioner argues that the remedies available under ADEA are still "circumscribed" within the Burke Court's meaning, Burke, --- U.S. at ----, 112 S.Ct. at 1873, because, like the unamended version of Title VII, ADEA does not provide damages for plaintiffs' emotional distress or pain and suffering. See Chancellier v. Federated Dep't Stores, 672 F.2d 1312, 1318 (9th Cir.), cert. denied, 459 U.S. 859, 103 S.Ct. 131, 74 L.Ed.2d 113 (1982); Naton v. Bank of California, 649 F.2d 691, 698-99 (9th Cir.1981). The Commissioner argues that ADEA liquidated damages represent only punitive damages, and thus the statute does not evidence a tort-like conception of remedy.

We disagree. The case law and legislative history indicate that ADEA liquidated damages have a compensatory as well as a punitive purpose. See Section B, infra. In addition, "Burke does not require that a statute provide the complete spectrum of tort remedies before it may be deemed to redress a tort-type right." Bennett, 30 Fed.Cl. at 400. As other courts have held, ADEA's liquidated damages provision, as well as its provision for jury trials, distinguishes ADEA from the statute discussed in Burke. Moreover, even if ADEA liquidated damages have a punitive purpose, such a purpose appears more tort-like than contract-like.

We cannot accept the Commissioner's argument that ADEA actions are basically ex contractu. See, e.g., Redfield, 940 F.2d at 546 ("Nothing in ADEA reflects a congressional attempt to rewrite the terms of employment contracts."). Contract rights arise from the parties' private-law relationship; each litigant's rights and duties depend primarily on the terms of their agreement. In contrast, a tort is "a 'legal wrong committed upon the person or property independent of contract' ... 'a violation of some duty owing to the plaintiff, ... generally, [arising] by operation...