Whitehead v. Commissioner
| Decision Date | 17 November 1980 |
| Docket Number | Docket No. 4303-78. |
| Citation | 1980 TC Memo 508,41 TCM (CCH) 365 |
| Court | U.S. Tax Court |
| Parties | Fred A. Whitehead and Carol S. Whitehead v. Commissioner. |
Fred A. Whitehead, pro se, 20 South 16th St., Kansas City, Kan. James A. Jaeger, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioners' Federal income tax for the calendar year 1974 in the amount of $2,404.42. The only issue for decision is whether a payment of $11,600 made to petitioner Fred A. Whitehead by Southern Illinois University in 1974 is includable in gross income under section 61, I.R.C. 1954,1 or is excludable from income under section 104(a) (2).
Some of the facts have been stipulated and are found accordingly.
Petitioners, Fred A. and Carol S. Whitehead, husband and wife, resided in Kansas City, Kansas, at the time of the filing of their petition in this case. They filed a joint Federal income tax return for the calendar year 1974 with the Office of the Internal Revenue Service at Austin, Texas.
Fred A. Whitehead (petitioner) entered the University of Kansas in 1962 and received his bachelor's degree in 1965, graduating Phi Beta Kappa from that institution. Petitioner also received the Woodrow Wilson fellowship and Danforth fellowship in 1965. From 1965 to 1966, he was a Fulbright scholar in London, England. In 1967, petitioner received his master's degree, with highest honors, and received his Ph.D. in 1972 from Columbia University.
On May 15, 1970, petitioner was hired as an assistant professor of English by Southern Illinois University at Carbondale (SIUC), located in Carbondale, Illinois. He was employed under a "continuing" appointment which implied that he would be reappointed on a year-by-year basis, unless he was given notice to the contrary. In each of the three succeeding years, petitioner was reappointed. His last reappointment at SIUC was for the 1973-1974 academic year and his salary was $11,600.
The rights and responsibilities of an assistant professor at SIUC are set forth in the Southern Illinois University By-Laws and Statutes. The by-laws and statutes were regarded as a part of petitioner's employment contract with the school. They provided that prior to the end of a four-year probationary period an assistant professor must be notified in writing either that he has been given tenure or that his appointment will not be renewed at the end of the fifth year. On December 7, 1973, petitioner received a letter from William E. Simeone, chairman of the Department of English, stating that the Departmental Committee on Tenure and Promotions voted to recommend him for tenure.
SIUC is a state university and operates on a fiscal year ending June 30. Its budget for each fiscal year is established by the Illinois Board of Higher Education. On December 4, 1973, the Board issued its budgetary report for the fiscal year 1975. It recommended a reduction in the base of the SIUC budget by $2,050,800 and an additional work incentive reduction in the amount of $587,400 along with increases in certain areas such as a 5 percent salary increase. These recommendations resulted in a total reduction in the operating costs budget of the university for the fiscal year 1975 in the amount of $2,746,700 while the total budget increased from $58 million to $62 million. The Illinois Board of Higher Education gave the following three reasons for the budget reduction: (a) the decrease in enrollment and the projection for further decreases; (b) the unfavorable teacher-student ratio in terms of numbers of teachers to numbers of students; and (c) a higher than average cost of instruction per student factor and a lower credit hour production of some departments within the instructional units.
In response to the proposed budget reduction, the SIUC Board of Trustees met on December 13, 1973, and declared that a demonstrably bona fide financial exigency existed at the school which would require program cutbacks or elimination and a reduction in all functions of the university, primarily in the academic program of the school. Accordingly, the Board of Trustees ordered a reduction in the personnel connected with the academic programs and it directed the administration of SIUC to effect such reduction.
During December 1973, SIUC sent notices of termination effective June 30, 1974, to approximately 104 faculty members, including employees who had term, continuing, tenured and nontenured appointments. In a letter dated December 13, 1973, petitioner received his official notice of termination. The letter stated that his dismissal was due to the financial exigency which existed at the university and was not due to any dissatisfaction with the performance of petitioner's assigned duties. It concluded that the university would assist him in any way possible to secure future employment.
On January 18, 1974, the Board of Trustees of SIUC filed a "Complaint for Declaratory Judgment—Class Action" against six defendants who were each members of the six different classes of faculty members whose employment was terminated. The purpose of the suit against the terminated faculty was to obtain a final determination of the university's rights and responsibilities. In particular, the university requested that the court find that the financial exigency declared was bona fide and that the termination of the faculty members had been in accordance with the by-laws and statutes of the Board of Trustees of SIUC. Petitioner was not a named defendant and did not assume any active role in the lawsuit.
After receiving notice of termination, petitioner, in a letter dated January 8, 1974, filed for a grievance hearing with President David Derge of SIUC in accordance with Article VIII, Section 5, of the statutes of the Board of Trustees. The request for a grievance hearing was denied and the university administration stated that such a hearing would not be granted until a final decision was rendered by the court.
In the early part of 1974, the university, through its Vice President for Academic Affairs and Provost, sought to negotiate a settlement with each of the 104 terminated faculty members. The basic guideline in negotiating each of the settlements was that the individual terminated would be paid an amount equivalent to one year's salary. In addition, other factors such as sabbatical leave, accumulated sick and vacation time, pending retirement considerations, past salary inequities, along with other Affirmative Action considerations could be considered on an individual basis. In any event, settlement was conditioned upon a signed all-inclusive release from any and all claims of whatever nature the faculty member may have against the university, including but not limited to tort action such as defamation and loss of reputation. The requirement of a release of all claims against the university in return for settlement was based on the fact that the university did not have the authority to pay wages for work not performed but it did have the authority to settle claims arising out of a dispute with the university. Therefore, the payment was a lump-sum settlement for any disputed claims and was not considered by the university to be salary or wages.
Pursuant to the above-stated guidelines, petitioner, on May 1, 1974, signed the following release:
After petitioner left the university in 1974, he used the settlement proceeds to attend welding school and thereafter worked three years as an industrial welder in Kansas City. At the time of trial, petitioner was an administrator...
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