Comm'n Internal Revenue v. Schleier

515 U.S. 323

115 S.Ct. 2159

132 L.Ed.2d 294

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

v Erich E. SCHLEIER and Helen B. Schleier, Respondents.

No. 94-500.

Supreme Court of the United States

Argued March 27, 1995.

Decided June 14, 1995.

Syllabus ^*

On his 1986 federal income tax return, Erich Schleier (hereinafter respondent) included as gross income the backpay portion, but not the liquidated damages portion, of an award that he received in settlement of a claim under the Age Discrimination in Employment Act of 1967 (ADEA). After the Commissioner issued a deficiency notice, asserting that the liquidated damages should have been included as income, respondent initiated Tax Court proceedings, contesting that ruling and seeking a refund for the tax he had paid on his backpay. The Tax Court agreed with respondent that the entire settlement constituted "damages received . . . on account of personal injuries or sickness" within the meaning of § 104(a)(2) of the Internal Revenue Code and was therefore excludable from gross income. The Court of Appeals affirmed.

Held: Recovery under the ADEA is not excludable from gross income. A taxpayer must meet two independent requirements before a recovery may be excluded under § 104(a)(2): the underlying cause of action giving rise to the recovery must be "based upon tort or tort type rights", and the damages must have been received "on account of personal injuries or sickness." Respondent has failed to satisfy either requirement. Pp. ____.

(a) No part of respondent's settlement is excludable under § 104(a)(2)'s plain language. Recovery for back wages does not satisfy the critical requirement of being "on account of" any personal injury, and no personal injury affected the amount of back wages recovered. In addition, this Court explicitly held in Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 125, 105 S.Ct. 613, 623-624, 83 L.Ed.2d 523, that Congress intended the ADEA's liquidated damages to be punitive in nature; thus, they serve no compensatory function and cannot be described as being "on account of personal injuries." Pp. ____.

(b) There is also no basis for excluding respondent's recovery from gross income under the Commissioner's regulation interpreting § 104(a)(2). Even if respondent were correct that this action is based on "tort or tort type rights" within 26 CFR § 1.104-1(c)'s meaning, this requirement is not a substitute for the statutory requirement that the amount be received "on account of personal injuries or sickness"; it is an additional requirement. Pp. ____-____.

(c) Nor is respondent's recovery based upon "tort or tort type rights" as that term was construed in Burke, where this Court rejected the argument that a taxpayer's backpay settlement under pre-1991 Title VII of the Civil Rights Act of 1964 should be excluded from gross income. Two elements that distinguish the ADEA from pre-1991 Title VII—namely the ADEA rights to a jury trial and liquidated damages—are insufficient to bring the ADEA within Burke's conception of a "tort or tort type righ[t]," for the statute lacks the primary characteristic of such an action: the availability of compensatory damages. Moreover, satisfaction of Burke's "tort or tort type" inquiry does not eliminate the need to satisfy the other requirement for excludability discussed herein. Pp. ____.

26 F.3d 1119 (CA5 1994), reversed.

STEVENS, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and KENNEDY, GINSBURG, and BREYER, JJ., joined. SCALIA, J., concurred in the judgment. O'CONNOR, J., filed a dissenting opinion, in which THOMAS, J., joined, and in Part II of which SOUTER, J., joined.

Kent L. Jones, Washington, DC, for petitioner.

Thomas F. Joyce, Chicago, IL, for respondents.

Justice STEVENS delivered the opinion of the Court.

The question presented is whether § 104(a)(2) of the Internal Revenue Code authorizes a taxpayer to exclude from his gross income the amount received in settlement of a claim for backpay and liquidated damages under the Age Discrimination in Employment Act of 1967 (ADEA).

I

Erich Schleier (respondent) ¹ is a former employee of United Airlines, Inc. (United). Pursuant to established policy, United fired respondent when he reached the age of 60. Respondent then filed a complaint in Federal District Court alleging that his termination violated the ADEA.

The ADEA "broadly prohibits arbitrary discrimination in the workplace based on age." Lorillard v. Pons, 434 U.S. 575, 577, 98 S.Ct. 866, 868, 55 L.Ed.2d 40 (1978); Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 120, 105 S.Ct. 613, 621, 83 L.Ed.2d 523 (1985); see also McKennon v. Nashville Banner Publishing Co., 513 U.S. ----, ----, 115 S.Ct. 879, 883-884, 130 L.Ed.2d 852 (1995). Subject to certain defenses, see 29 U.S.C. § 623(f) (1988 ed. and Supp. V), §§ 4 and 12 of the ADEA make it unlawful for an employer, inter alia, to discharge any individual between the ages of 40 and 70 "because of such individual's age." 29 U.S.C. §§ 623(a)(1) and 631(a). The ADEA incorporates many of the enforcement and remedial mechanisms of the Fair Labor Standards Act (FLSA). Like the FLSA, the ADEA provides for "such legal or equitable relief as may be appropriate to effectuate the purposes of this chapter." § 626(b). That relief may include "without limitation judgments compelling employment, reinstatement or promotion." Ibid. More importantly for respondent's purposes, the ADEA incorporates FLSA provisions that permit the recovery "of wages lost and an additional equal amount as liquidated damages." § 216(b). See generally McKennon, 513 U.S. at ----, 115 S.Ct., at 883-884.

Despite these broad remedial mechanisms, there are two important constraints on courts' remedial power under the ADEA. First, unlike the FLSA, the ADEA specifically provides that "liquidated damages shall be payable only in cases of willful violations of this chapter." 29 U.S.C. § 626(b); see Trans World Airlines, Inc. v. Thurston, 469 U.S., at 125, 105 S.Ct., at 623. Second, the Courts of Appeals have unanimously held, and respondent does not contest, that the ADEA does not permit a separate recovery of compensatory damages for pain and suffering or emotional distress.²

Respondent's ADEA complaint was consolidated with a class action brought by other former United employees challenging United's policy. The ADEA claims were tried before a jury, which determined that United had committed a willful violation of the ADEA. The District Court entered judgment for the plaintiffs, but that judgment was reversed on appeal. See Monroe v. United Air Lines, Inc., 736 F.2d 394 (CA7 1984). The parties then entered into a settlement, pursuant to which respondent received $145,629. Half of respondent's award was attributed to "backpay" and half to "liquidated damages." United did not withhold any payroll or income taxes from the portion of the settlement attributed to liquidated damages.

When respondent filed his 1986 federal income tax return, he included as gross income the backpay portion of the settlement, but excluded the portion attributed to liquidated damages. The Commissioner issued a deficiency notice, asserting that respondent should have included the liquidated damages as gross income. Respondent then initiated proceedings in the Tax Court, claiming that he had properly excluded the liquidated damages. Respondent also sought a refund for the tax he had paid on the backpay portion of the settlement. The Tax Court agreed with respondent that the entire settlement constituted "damages received . . . on account of personal injuries or sickness" within the meaning of § 104(a)(2) of the Code and was therefore excludable from gross income. Relying on a prior Circuit decision that had in turn relied on our decision in United States v. Burke, 504 U.S. 229, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992), the Court of Appeals for the Fifth Circuit affirmed. Because the Courts of Appeals have reached inconsistent conclusions as to the taxability of ADEA recoveries in general and of the United settlement in particular, compare Downey v. Commissioner, 33 F.3d 836 (CA7 1994) (United settlement award is taxable) with Schmitz v. Commissioner, 34 F.3d 790 (CA9 1994) (United settlement award is excludable), we granted certiorari, 513 U.S. ----, 115 S.Ct. 507, 130 L.Ed.2d 415 (1994). Our consideration of the plain language of § 104(a), the text of the regulation implementing § 104(a)(2), and our reasoning in Burke convinces us that a recovery under the ADEA is not excludable from gross income.

II

Section 61(a) of the Internal Revenue Code provides a broad definition of "gross income": "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived." 26 U.S.C. § 61(a). We have repeatedly emphasized the "sweeping scope" of this section and its statutory predecessors. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429, 75 S.Ct. 473, 475, 99 L.Ed. 483 (1955). See also United States v. Burke, 504 U.S., at 233, 112 S.Ct., at 1870; Helvering v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 556, 84 L.Ed. 788 (1940). We have also emphasized the corollary to § 61(a)'s broad construction, namely the "default rule of statutory interpretation that exclusions from income must be narrowly construed." United States v. Burke, 504 U.S., at 248, 112 S.Ct., at 1878 (SOUTER, J., concurring in judgment); see United States v. Centennial Savings Bank FSB, 499 U.S. 573, 583, 111 S.Ct. 1512, 1519, 113 L.Ed.2d 608 (1991); Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477 (1949); United States v. Burke, 504 U.S., at 244, 112 S.Ct., at 1875-1876 (SCALIA, J., concurring in judgment).

Respondent recognizes § 61(a)'s "sweeping" definition and concedes that his settlement constitutes gross income unless it is expressly excepted by another provision in the Code. Respondent claims, however, that his settlement proceeds are excluded from § 61(a)'s...