John A. Schmitz, Mary B. Schmitz v. Commissioner of Internal Revenue

concurring in the judgment:

I agree with the majority’s conclusion that all damages received in settlement of an ADEA claim are excludable from gross income under § 104(a)(2) of the Internal Revenue Code. As I explained in my dissent in Hawkins v. United States, 30 F.3d 1077, 1085 (9th Cir.1994), I respectfully disagree with the majority’s adoption of a two-part test for analyzing whether damages are excludable under § 104(a)(2). Like the Tax Court, I believe the focus should be on whether the *797 ADEA redresses a tort-like personal injury claim. See Downey v. Commissioner, 100 T.C. 634, 657 , 1993 WL 231740 (1993). If the answer is yes, all damages received on account of that claim are not taxable. Because I agree with the majority that the ADEA creates a tort-like cause of action, both the backpay award and the liquidated damages award in this case should not be taxable.

The majority, however, has to square this result with the test they created in Hawkins . In Hawkins , the majority held that punitive damages received in a tort ease are taxable because they are “not necessarily awarded ‘on account of personal injury; rather, they are awarded ‘on account of the tortfeasor’s…

Opinion by Judge GOODWIN; Concurrence by Judge TROTT.

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. §§ 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. § 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…

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: 1 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…