Johnny L. BANKS; Edna J. Banks, husband & wifе and their marital community, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
No. 95-35045
United States Court of Appeals, Ninth Circuit
Argued and Submitted March 7, 1996. Decided April 16, 1996.
81 F.3d 874
Loretta C. Argrett, Assistant Attorney General, Gary R. Allen, Kenneth L. Greene, and Jonathan A. Wasserman, United States Department of Justice, Washington D.C., for defendant-appellant.
Before: FLETCHER, JOHN T. NOONAN, Jr., and RYMER, Circuit Judges.
OPINION
NOONAN, Circuit Judge:
The United States appeals a judgment of the district court granting a refund of federal income tax to Johnny and Edna Banks on the grounds that the tax was imposed on the proceeds of a settlement with his union for breach of the duty of fair reрresentation and that the proceeds were excludable from gross income under
FACTS
The facts that preceded the settlement are set out in Banks v. Bethlehem Steel Corporation, 870 F.2d 1438 (9th Cir.1989), as follows: Johnny Banks had an unblemished employment record of 12 years of exemplary service at Bethlehem Steеl Corporation (Bethlehem). After working double shifts and logging in a total of 70 hours in four days, he arrived home in the early morning of July 27, 1984 to be called back for another double shift to begin at 5:00 a.m. He did go back at 10:00 a.m. into a mill where the temperature was well over 100 degrees. The ventilation was poor. He took a fan to improve it. A fellow worker, Davis, attempted to claim the fan for
Banks then brought suit against Bethlehem and the Union, alleging that Bethlehem had discharged him without just cause and had acted with rаcial animus in violation of
On appeal we affirmed the judgment for Bethlehem on the Title VII claim but reversed and remanded on the breach of fair representation claim, holding that summary judgment had been inappropriate. We found two issues open for trial: whether Hughes’ decision to settle had been made in good faith and whether the Union‘s pоlicy of not calling employee witnesses to testify against fellow employees was arbitrary. Id. at 1445.
On remand, a bench trial followed, at the end of which the district court held that Banks “was not dischargеd for just cause” and “would have been reinstated after an arbitration.” The court also held that Banks had been prejudiced by the Union‘s policy as to employee witnesses and that the Union had acted in bad faith in refusing to take the matter to arbitration. The court found Banks’ damages to be $134,532, measured by the court‘s estimate of Banks’ past and future wages.
After the court had issued its findings and conclusions of law but before the entry of judgment, the parties settled. Bethlehem paid Banks $28,500 to settle the claim of wrongful discharge, of which after paying attorneys fees and costs Banks received $14,000. The Union paid Banks $150,000 for the settlement of the claim for breach of duty of fair representation, of which, after paying attorneys fees and costs, Banks received $80,568.36.
Johnny and Edna Bаnks filed a joint return for the 1990 tax year. They reported the amount received from Bethlehem as income from settlement of a breach of contract. They excluded the settlement from the Union under
PROCEEDINGS
In the district court the parties cross-moved for summary judgment on the issue of whether the proceeds of the settlement with thе Union were excludable under
The United States appeals.
ANALYSIS
The statute provides:
[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 persоnal injuries or sickness;
The term ‘damages received (whether by suit or agreement)’ means an amount received (оther than workmen‘s compensation) 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 prоsecution.
26 C.F.R. § 1.104-1(c) .
The language of the statute and the gloss of the regulation have recently been repeated by the Supreme Court. Commissioner of Internal Revenue v. Schleier, 515 U.S. 323, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995). As the Court restated, both conditions must be met. The injury must be tort-like. Thе payment must be on account of personal injuries. Specifically, in Schleier the Court held that a settlement of an action for damages under the Age Discrimination in Employment Act (ADEA) was not excludable from gross income. The reason was half of the award was attributed to liquidated damages, and the Court had already held that liquidated damages are punitive and not compensation for personal injuries, id. at 331-32, 115 S.Ct. at 2165, and the rest of the taxpayer‘s award was clearly attributed to “back pay” so that the settling employer had even withheld taxes on what were wages. Id. at 326, 115 S.Ct. at 2162.
The United States argues that Schleier controls this case, maintaining that everything that Banks received from the Union was for lost wages because the settlement was effected in light of the district court‘s finding that Banks was entitled to $134,533 from the Union measured by рast and future wage loss. In Schleier, the Court was determining the nature of damages awarded under ADEA. The Act allows damages only for lost pay enhanced in certain cases by an equal amount of punitivе damages. It does not allow recovery for emotional distress or other injury from the discrimination. Were such recovery allowable, the Court acknowledged the injury would qualify as “personаl injury” under the Internal Revenue Code. Id. at 329-30, 115 S.Ct. at 2164. Because the recovery in Schleier was economic compensation, it fell within what the Court has repeatedly referred to as the “sweeping scope” of the Internal Revenue Cоde taxation of “gross income,” which the Code defines as “all income from whatever source derived.” Id. at 328, 115 S.Ct. at 2163;
Schleier, however, was determined by the specific limitations of the ADEA and has no application here where neither punitive damages nor back wages were offered in the settlement. Unions do not pay wages to their members, and what the Union paid in settlement here to Banks did nоt constitute wages. It paid damages to compensate for its unfair and arbitrary treatment of Banks, conduct that the court had found to be in bad faith and in violation of the Union‘s duty to fairly reprеsent Banks. We look to the nature of the injuries that were being compensated. Roemer v. Commissioner of Internal Revenue, 716 F.2d 693, 697 (9th Cir.1983). Banks’ injuries were, as the district court found, personal injuries. Consequently, the settlement was of a tort-like cause of action and the sum paid was on account of personal injuries and by statute excluded from gross income.
AFFIRMED.
RYMER, Circuit Judge, dissenting:
This is a close call but at the end of the day, I believe that whether a settlement consists of back pay that is excludable under