Lane v. US, CIV-94-1833-R.

902 F. Supp. 1439

Kari LANE, Plaintiff, v. UNITED STATES of America, Defendant.

No. CIV-94-1833-R.

United States District Court, W.D. Oklahoma.

August 2, 1995.

Patrick M. Castleberry, Scott C. Sublett, Kline & Kline, Oklahoma City, OK, for plaintiff.

Ronny D. Pyle, U.S. Attorney's Office, Oklahoma City, OK, Charles P. Hurley, U.S. Department of Justice, Tax Division, Washington, DC, for defendant.

ORDER

DAVID L. RUSSELL, Chief Judge.

Before the Court are cross motions for summary judgment on Plaintiff's Complaint, pursuant to which Plaintiff seeks a refund, with interest, of $45,313.00 of federal income taxes paid to the Internal Revenue Service respecting Plaintiff's 1989 form 1040.

The material facts are not in dispute. Two issues are framed by the parties' motions and briefs in support of and in opposition to the motions for summary judgment:

1. Are all amounts paid under the Hartford-Autery Estate settlement agreement, including those received by Plaintiff, either includable as gross income and subject to federal income taxes or, alternatively, exempt from gross income under 26 U.S.C. § 104(a)(2) because the settlement agreement was silent as to the allocation of any amounts to particular claims and/or types of damages?

2. Does 26 U.S.C. § 104(a)(2) exempt punitive damages and/or post-judgment interest from gross income and federal income taxation?

Plaintiff in an initial argument asserts that the "settlement agreement" between her mother's estate (the "Autery Estate") and Hartford Accident and Indemnity Company ("Hartford") does not allocate any of the amounts paid by Hartford to any particular claims or kinds of damages and Defendant agrees. The parties, however, reach differing conclusions as to the effect of this failure to allocate. Plaintiff asserts that the Estate's claim which was the subject of the settlement agreement was for Hartford's bad faith refusal to honor the Estate's UM claim, which is a tortious personal injury to the Estate. Accordingly, Plaintiff asserts that all amounts received under the Settlement Agreement were "received ... by ... agreement ... on account of personal injury," 26 U.S.C. § 104(a)(2) and were "received ... through prosecution of a legal suit ... based upon tort or tort type rights," Treas.Reg. § 1.104-1(c), and are therefore expressly exempt from gross income. Defendant on the other hand asserts that the absence of allocation within the settlement agreement of payment among the various claims that were asserted or among the elements of damages awarded by the trial court renders the entire amount paid includable as income, citing Taggi v. United States, 835 F.Supp. 744, 746 (S.D.N.Y.1993), aff'd, 35 F.3d 93 (2nd Cir. 1994); Villaume v. United States, 616 F.Supp. 185, 190 (D.Minn.1985); and Whitehead v. Commissioner of Internal Revenue, 41 T.C.M. (CCH) 365, 369, 1980 WL 4334 (1980). In the alternative Defendant asserts that Plaintiff has the burden of proving how the parties to the actual settlement allocated the payment among claims, citing INDOPCO, Inc. v. Commissioner of Internal Revenue, 503 U.S. 79, 84, 112 S.Ct. 1039, 1043, 117 L.Ed.2d 226, 233 (1992); United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991); and Doyal v. Commissioner of Internal Revenue, 616 F.2d 1191, 1192 (10th Cir. 1980).

Plaintiff in the alternative and in opposition to Defendant's motion states as follows:

If the settlement agreement is to be viewed in the context of the litigation at the time of settlement, then the Court may determine the character of each settlement dollar, logically by identifying which damage issues were foreclosed and calculable at the time of settlement, and which were not.

Plaintiff's Brief in Support of her Motion for Summary Judgment and in Opposition to Defendant's Motion for Summary Judgment at p. 12.

Plaintiff then explains that after trial, appeal, remand, the trial court's reduction of compensatory and punitive damages on remand, and the trial court's entry of judgment, the trial court's awards of contract damages in the amount of $600,000 and compensatory damages on the bad faith claim in the amount of $130,000 were final, and only the trial court's award of punitive damages on the bad faith claim in the amount of $300,000 was nonfinal since this was the only issue which was the subject of an appeal to the Tenth Circuit Court of Appeals when the parties settled the litigation by written agreement for $1,313,754. Plaintiff thus suggests that $600,000 of the settlement proceeds should be allocated to contract damages; $130,000 to compensatory damages; and $583,754 to punitive damages, representing a rough split between the first award of punitive damages in the amount of $900,000 and the reduced award, following remand, of $300,000 in punitive damages, the "possible appeal outcomes." Plaintiff asserts that no amount should be allocated to post-judgment interest because post-judgment interest was not calculable at the time the parties settled inasmuch as the unresolved amount of punitive damages prevented calculation of a total principal amount on which to compute interest. Plaintiff then asserts that all settlement amounts are excludable from income pursuant to 26 U.S.C. § 104(a)(2) and (3).

In asserting that the settlement proceeds allocable to punitive damages are exempt from gross income and income taxes under Section 104(a)(2)¹, Plaintiff relies on that statutory provision, Revenue Ruling 75-45, the Sixth Circuit case of Horton v. Commissioner of Internal Revenue, 33 F.3d 625 (6th Cir.1994), and the United States Tax Court's rulings in Miller v. Commissioner, 93 T.C. 330 (1989) (reversed by the Fourth Circuit in Commissioner of Internal Revenue v. Miller, 914 F.2d 586 (4th Cir.1990)), and Estate of Moore v. Commissioner of Internal Revenue, 67 T.C.M. (CCH) 1925, 1994 WL 1705 (1994) (reversed by the Fifth Circuit in Estate of Moore v. Commissioner of Internal Revenue, 53 F.3d 712 (5th Cir.1995)), and attacks the reasoning and decisions of the circuit courts holding that punitive damages are not exempt under Section 104(a)(2). Defendant relies on the principle of narrow construction of exclusions from income, Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477, 490 (1949), the circuit court cases of Wesson v. United States, 48 F.3d 894, 899 (5th Cir.1995); Hawkins v. United States, 30 F.3d 1077 (9th Cir.1994), cert. denied, ___ U.S. ___, 115 S.Ct. 2576, 132 L.Ed.2d 827 (1995); Reese v. United States, 24 F.3d 228, 231 (Fed.Cir.1994); and Commissioner of Internal Revenue v. Miller, 914 F.2d 586 (4th Cir.1990), and the United States' Supreme Court's pronouncement in Commissioner v. Schleier, 515 U.S. ___, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995) that because liquidated damages under the Age Discrimination in Employment Act of 1967, 29 U.S.C. § 621 et seq., are intended to be punitive in nature, they "are not received on account of personal injury or sickness." Schleier, 515 U.S. at ___, 115 S.Ct. at 2165, 132 L.Ed.2d at 303-304.

A number of cases do hold that where a settlement agreement is silent as to what portion, if any, of settlement proceeds should be allocated to damages which are excludable from income under 26 U.S.C. § 104(a)(2), all of the settlement proceeds are considered income. See, e.g., Taggi v. United States, 835 F.Supp. 744, 746 (S.D.N.Y.1993), aff'd, 35 F.3d 93, 96 (2nd Cir.1994); Whitehead v. Commissioner of Internal Revenue, 41 T.C.M. (CCH) 365, 369 (1980). Other courts have indicated a willingness to look at the allegations contained in the plaintiff's complaint, evidence and arguments presented at trial and the jury verdict, i.e., the status and outcome of any suit filed before settlement to determine what portion of settlement proceeds, if any, should be allocated to income and what portion, if any, is excludable from income. See Commissioner v. Miller, 914 F.2d at 592; Glatthorn v. United States, 818 F.Supp. 1548, 1551-52 (S.D.Fla.1993); Villaume v. United States, 616 F.Supp. 185, 187-89 (D.C.Minn.1985); Miller v. Commissioner of Internal Revenue, 65 T.C.M. (CCH) 1884, 1993 WL 28556 (1993) (on remand), aff'd, 60 F.3d 823 (4th Cir.1995); Eisler v. Commissioner of Internal Revenue, 59 T.C. 634, 640, 1973 WL 2521 (1973). Cf. Knuckles v. Commissioner of Internal Revenue, 349 F.2d 610 (10th Cir.1965) (in the absence of an express personal injury settlement agreement, intent of the payor as the purpose in making the payment is most important fact). Indeed, in Glatthorn v. United States, the United States District Court for the Southern District of Florida said:

When a lump sum settlement encompasses both tort and contract claims, an allocation must be made between and among the various claims. If the parties themselves do not make the allocation in a settlement agreement, the court must do so. Eisler v. Commissioner, 59 T.C. 634, 640 1973 WL 2521 (1973). The Court should consider several factors, including the pleadings, the evidence, the terms of the settlement, and the intent of the payor. See Threlkeld v. Commissioner, 87 T.C. 1294, 1306 1986 WL 22061 (1986), aff'd, 848 F.2d 81 (6th Cir.1988). "In a given case, any one of these factors may be ultimately persuasive or ignored." Id. "The nature of the payments ... is a question of fact to be decided from a consideration of all the factors surrounding the payment." McKim v. Commissioner, 40 Tax Ct.Mem.Dec. (CCH) 9, 12 (March 26, 1980) (citing Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir.1965); Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir.1961); Seay v. Commissioner 1972 WL 2542, 58 T.C. 31 (1972).

Glatthorn v. United States, 818 F.Supp. at 1551 (footnote omitted) (emphasis added).

It is undisputed that following remand, the Autery Estate was awarded $600,000 in contract damages on its claim on the policy for uninsured motorists' benefits; $130,000 in compensatory damages on its tort claim for bad faith refusal to honor the estate's...