Johnny L. Banks Edna J. Banks, Husband & Wife and Their Marital Community v. United States

81 F.3d 874 151 L.R.R.M. (BNA) 2999 , 77 A.F.T.R.2d 96-1789, 64 USLW 2673 , 96-1 USTC P 50,212 , 96 Cal. Daily Op. Serv. 2650 , 96 Daily Journal D.A.R. 4390 Johnny L. BANKS; Edna J. Banks, husband & wife 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. Kenneth C. Weil, Seattle, Washington, for plaintiffs-appellees. 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. Appeal from the United States District Court for the District of Washington; Barbara J. Rothstein, Chief Judge, Presiding. Before: FLETCHER, JOHN T. NOONAN, Jr., and RYMER, Circuit Judges. OPINION NOONAN, Circuit Judge: 1 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 representation and that the proceeds were excludable…

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 representation and that the proceeds were excludable from gross income under Internal Revenue Code § 104(a)(2). Holding that the settlement with the union was for a tort-like injury and that the sum received was not wages but compensation on account of personal injuries, we affirm the district court.

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 Steel 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…

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 26 U.S.C. § 104 (a)(2) turns not on who is making the payment but on what is being compensated. Commissioner of Internal Revenue v. Schleier, — U.S.-,-,- -, 115 S.Ct. 2159, 2164, 2166-67 , 132 L.Ed.2d 294 (1995). Arbitrary treatment by a union in breach of its duty of fair representation potentially could cause both personal *877 injury and loss of wages. 1 In this ease, the parties agreed that Banks suffered a nonphysical, personal injury. However, so far as I can tell, there is no indication that Banks’s lost wages resulted from being out of work because of his intangible personal injuries. Thus, even though the Union’s breach of duty may have caused intangible personal injury, that injury did not cause Banks to lose wages. He lost wages because he was discharged, and because the Union failed to grieve; the personal injury did not affect the amount of back wages recovered. As I read Schleier , the two must be linked in order for a recovery of lost wages to be “on account of’ personal injury. I would, therefore, reverse.

. Although unions…