Sparrow v. C.I.R.

• Citation: 949 F.2d 434,292 U.S.App.D.C. 259
• Decision Date: 05 February 1992
• Docket Number: No. 90-1151,90-1151
• Parties: 57 Fair Empl.Prac.Cas. (BNA) 592, 57 Empl. Prac. Dec. P 41,108, 292 U.S.App.D.C. 259, 69 A.F.T.R.2d 92-325, 60 USLW 2368, 91-2 USTC P 50,567 Cleveland Buchanan SPARROW, Sr., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 434

949 F.2d 434

57 Fair Empl.Prac.Cas. (BNA) 592,

57 Empl. Prac. Dec. P 41,108, 292 U.S.App.D.C. 259,

69 A.F.T.R.2d 92-325, 60 USLW 2368,

91-2 USTC P 50,567

Cleveland Buchanan SPARROW, Sr., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 90-1151.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 30, 1991.

Decided Nov. 26, 1991.

Rehearing En Banc Denied

Feb. 5, 1992.

Appeal from the United States Tax Court (Tax Court No. 10073-87).

Cleveland Buchanan Sparrow, Sr., pro se.

David M. Dorsen, Washington, D.C., for amicus curiae.

Bruce R. Ellisen, Atty., Dept. of Justice, for appellee. Shirley D. Peterson, Asst. Atty. Gen. and, Gary R. Allen, Ann B. Durney and Janet A. Bradley, Attys., Dept. of Justice, Washington, D.C., were on the brief, for appellee.

Before MIKVA, Chief Judge, SENTELLE and HENDERSON, Circuit Judges.

Opinion for the court filed by Circuit Judge HENDERSON.

KAREN LeCRAFT HENDERSON, Circuit Judge:

The issue in this appeal is whether back pay awarded in settlement of a racial discrimination claim filed under Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e et seq. (1988), is excludable from a taxpayer's income as damages received on account of a personal injury under section 104(a)(2) of the Internal Revenue Code. The Tax Court held that such an award is not. Sparrow v. Commissioner, 57 T.C.M. (CCH) 816 (1989). We affirm.

I.

This case was tried on stipulated facts below. The appellant, Cleveland B. Sparrow, Sr., was employed as a GS-9 computer specialist with the Department of the Navy for a period before February 14, 1977. On that date, Sparrow resigned his position after receiving a notice of removal and filed a complaint under Title VII ¹ alleging inter alia, that he had been the victim of racial discrimination. The Navy rejected Sparrow's complaint. Sparrow then sought review by the Equal Employment Opportunity Commission (EEOC). On January 31, 1980, the EEOC held that the Navy had violated its regulations in terminating Sparrow and ordered it to reinstate him pending its investigation of Sparrow's alleged unlawful discharge and other complaints. Although the Navy did begin an investigation, it did not reinstate Sparrow.

Thereafter, Sparrow sought an injunction enforcing the EEOC's order in the district court. The district court denied Sparrow's request as moot because the Navy had begun to investigate but its decision did not address the Navy's failure to reinstate Sparrow.

Shortly after the Navy completed its investigation, Sparrow agreed to settle his complaint. Under the settlement agreement, Sparrow withdrew his request for a hearing on the complaint and also agreed not to initiate any future action or proceeding alleging racial discrimination or reprisal arising out of his employment with the Navy. The settlement agreement covered Sparrow's claims "in law or in equity, including, but not limited to, any and all claims under the Back Pay Act of 1966 ² ... and Title VII of the Civil Rights Act of 1964 ... or the provisions of the United States Constitution." 57 T.C.M. (CCH) at 817.

In return, the Navy agreed, among other things, to pay Sparrow the sum of $92,300. Of this amount, $69,284 was paid on Sparrow's claim for reinstatement for the period from January 31, 1980, through October 27, 1982, when the Navy completed its investigation. The remaining $23,016 ³ was allocated to the settlement of Sparrow's remaining claims (and was expressly conditioned on Sparrow's faithful performance of his obligations under the agreement).

The Navy then paid Sparrow $71,202 in 1982, $15,344 in 1983 and $5,754 in 1984. Sparrow did not report any of these payments as income on his tax returns for the years 1982 through 1984. The Commissioner of Internal Revenue (Commissioner) issued a notice of deficiency determining that Sparrow had under-reported his income in the years 1982 through 1984 and assessed additional taxes and penalties.

Sparrow then filed a petition in the United States Tax Court arguing that the settlement payments were excludable from his gross income under section 104(a)(2) of the Internal Revenue Code, 26 U.S.C. § 104(a)(2), which provides that "gross income does not include ... the amount of any damages received ... on account of personal injuries." Specifically, Sparrow argued that racial discrimination was a personal injury and that the payments he received in settlement of his claim of racial discrimination were therefore non-taxable damages.

The Tax Court did not agree. It first analyzed the nature of the payments Sparrow received under the settlement agreement, finding that the $69,284 paid in settlement of Sparrow's claim for reinstatement for the period from January 31, 1980, through October 27, 1982, was compensation for the salary Sparrow "would have received had the Navy Department complied with the EEO Commission's reinstatement order." 57 T.C.M. at 819. Accordingly, the Tax Court held this amount of the settlement was back pay which was taxable as income. Id.

The Tax Court then turned to the remaining $23,016 of the settlement agreement. While it noted that "the character" of the payments "was not clearly described in the settlement agreement," it concluded that the payments were "intended to be compensation in lieu of salary payments." Id. In reaching this conclusion, the Tax Court first found that the settlement agreement had provided for Sparrow's retroactive promotion from GS-9 to GS-11 effective February 14, 1976, one year to the day before Sparrow resigned. It then concluded that a portion of the $23,016 was attributable to the pay differential between the GS-11 salary he should have received and the GS-9 salary he actually received. While the record does not indicate the precise amount, the Tax Court inferred that the portion of the $23,016 not attributable to the GS-11/GS-9 pay differential "represented compensation [Sparrow] would have earned had he not been wrongfully discharged as found by the EEO Commission and remained on the payroll for a period either prior to January 31, 1980, or after October 27, 1982." Id. The Tax Court also noted that the Navy had described the payments as "Nonemployee Compensation" on the 1099 Forms it filed with the Internal Revenue Service. The Tax Court viewed this as evidence that the Navy "intended to make compensation rather than damage payments." ⁴ Id. Finally, after reviewing the language and legislative history of Title VII, the Tax Court concluded that, because Title VII authorizes only equitable remedies, including back pay, the payments received by Sparrow were not damages excludable from income under section 104(a)(2).

II.

Section 61 of the Internal Revenue Code defines gross income as "all income from whatever source derived." I.R.C. § 61(a), 26 U.S.C. § 61(a). The courts have consistently recognized that, in enacting this section, Congress intended to exercise "the full measure of its taxing power." Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429, 75 S.Ct. 473, 475, 99 L.Ed. 483 (1955) (quotations omitted). Thus, it has long been recognized that section 61 states a rule of inclusion. Id. at 430, 75 S.Ct. at 476. In other words, unless another portion of the Internal Revenue Code specifically excludes an accession to wealth from taxation, a taxpayer must include it in his income.

A.

We deal here with one of the exclusions and its applicability to Sparrow's back pay award. Specifically, we are required to construe section 104(a)(2) which provides in relevant part that "gross income does not include ... the amount of any damages received (whether by suit or agreement and whether as lump sums or in periodic payments) on account of personal injuries or sickness." There are two elements to this exclusion: (1) the amount received must be damages and (2) the amount received as damages must result from a personal injury or sickness. Accordingly, for Sparrow to prevail, he must show both that he received damages and that they were received as compensation for a personal injury.

The predecessor of section 104(a)(2) was originally enacted as section 213(b)(6) of the Revenue Act of 1918, ch. 18, 40 Stat. 1066. This statute expressly exempted from income "the amount of any damages received whether by suit or agreement on account of such [personal] injuries or sickness." Id. (emphasis added). But neither the Revenue Act of 1918 nor its legislative history defined the meaning of damages. See 40 Stat. 1066, §§ 1, 200; H.R.Rep. No. 767, 65th Cong., 2d Sess. 9-10 (1918). We do know that, at that time, damages were a remedy at law. See, e.g., Rice & Adams Corp. v. Lathrop, 278 U.S. 509, 513, 49 S.Ct. 220, 222, 73 L.Ed. 480 (1929) ("No ground for equitable jurisdiction properly could be alleged, for, plainly, none existed, and the bill was merely for an accounting of profits and damages, the remedy at law which was complete.") (discussing Root v. Railway Co., 105 U.S. 189, 26 L.Ed. 975 (1882)); United States v. Oregon Lumber Co., 260 U.S. 290, 293, 43 S.Ct. 100, 100, 67 L.Ed. 261 (1922) ("plaintiff in error brought an action at law ... to recover damages"); Friederichsen v. Renard, 247 U.S. 207, 208, 38 S.Ct. 450, 450, 62 L.Ed. 1075 (1918) (plaintiff was not entitled to equitable relief but had remedy at law for damages); Archer v. Greenville Sand & Gravel Co., 233 U.S. 60, 64-66, 34 S.Ct. 567, 568-69, 58 L.Ed. 850 (1914) (reversing dismissal of bill in equity because "bill show[ed] a continuing trespass of such a nature and of such character of injury that remedies at law by actions for damages would be inadequate"); Javierre v. Central Altagracia, 217 U.S. 502, 508, 30 S.Ct. 598, 599, 54 L.Ed. 859 (1910) (reversing grant of injunction because "a suit for damages would have given adequate relief, and therefore the appellee should have been confined to its remedy at law"). Damages remain today a remedy at law. See, e.g., Curtis v. Loether, 415 U.S. 189, 94...