Jack R. Hawkins, Cynthia J. Hawkins, Husband & Wife v. United States

dissenting:

Attempting to provide some coherence to this muddled area of the law, the majority offers the following principle: damages are excludable from gross income under § 104(a)(2) if they constitute a restoration of capital. Because punitive damages are designed to punish the tortfeasor, not compensate the injured party, the majority concludes punitive damages are taxable. Although I agree that the majority’s restoration of capital rule may make sense as a matter of policy, I don’t think the text of § 104(a)(2), its legislative history, or the case law can be squared with the majority’s interpretation.

A. Section 104(a)(2) provides that gross income does not include “the amount of any damages received ... on account of personal injuries or sickness.” (emphasis added). As the Tax Court observed, “any damages” suggests “all damages.” Miller v. Commissioner, 93 T.C. 330, 338 , 1989 WL 104238 (1989), rev’d, 914 F.2d 586 (4th Cir.1990); see also Horton v. Commissioner, 100 T.C. 93, 95 , 1993 WL 28557 (1993). If Congress intended to exclude only compensatory damages from gross income, it certainly could have made that distinction explicit. The language of § 104(a)(2) simply does…

Opinion by Judge GOODWIN; Dissent by Judge TROTT.

The government appeals a summary judgment granted in favor of Jack and Cynthia Hawkins (“the taxpayers”). The district court concluded that the taxpayers’ punitive damage award was excludable from gross income as “damages received ... on account of personal injury.” 26 U.S.C. § 104 (a)(2). We reverse.

I.

The facts are undisputed. In 1979, Cynthia Hawkins crashed the taxpayers’ $8,000 car, totaling it. Ms. Hawkins and her hus *1079 band (“the Hawkinses”) filed a claim with their insurer, Allstate Insurance Company (“Allstate”), requesting a replacement car. Allstate agents allegedly pressured the couple into buying an inferior, less expensive replacement car for $6,741, and then failed to equip the new car with certain options. The Hawkinses sued Allstate for breach of good faith and fair dealing (insurance bad faith), ultimately recovering $15,000 in compensatory damages and $3.5 million in punitive damages. Hawkins v. Allstate Insurance Co., 152 Ariz. 490 , 733 P.2d 1073 , cert. denied, 484 U.S. 874 , 108 S.Ct. 212 , 98 L.Ed.2d 177 (1987).

On their 1988 federal income tax return, the Hawkinses initially reported $2,937,406 of…

30 F.3d 1077 74 A.F.T.R.2d 94 -5363, 63 USLW 2076 , 94-2 USTC P 50,386 Jack R. HAWKINS, Cynthia J. Hawkins, husband & wife, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. No. 93-15828. United States Court of Appeals, Ninth Circuit. Argued and Submitted April 11, 1994. Decided July 19, 1994. Gary R. Allen, Edward T. Perelmuter, Tax Div., U.S. Dept. of Justice, Washington, DC, for defendant-appellant. Kenneth J. Whitehead, Phoenix, AZ, for plaintiffs-appellees. Before GOODWIN, FERGUSON and TROTT, Circuit Judges. Opinion by Judge GOODWIN; Dissent by Judge TROTT. GOODWIN, Circuit Judge: 1 The government appeals a summary judgment granted in favor of Jack and Cynthia Hawkins ("the taxpayers"). The district court concluded that the taxpayers' punitive damage award was excludable from gross income as "damages received ... on account of personal injury." 26 U.S.C. Sec. 104 (a)(2). We reverse. I. 2 The facts are undisputed. In 1979, Cynthia Hawkins crashed the taxpayers' $8,000 car, totaling it. Ms. Hawkins and her husband ("the Hawkinses") filed a claim with their insurer, Allstate Insurance Company ("Allstate"), requesting a replacement car. Allstate agents…