UNITED STATES COURT OF APPEALS Tenth Circuit Byron White United States Courthouse 1823 Stout Street Denver, Colorado 80294 (303) 844-3157 Patrick J. Fisher, Jr. Elisabeth A. Shumaker Clerk Chief Deputy Clerk
January 13, 1997
TO: All recipients of the captioned order and judgment
RE: No. 96-9006, Gray v. CIR January 7, 1997
Please be advised of the following correction to the captioned decision:
The Order and Judgment filed January 7, 1997 is WITHDRAWN. Please substitute the following opinion.
The opinion is attached for your convenience.
Very truly yours,
Patrick Fisher, Clerk
Susie Tidwell Deputy Clerk
Encl. PUBLISH
UNITED STATES COURT OF APPEALS TENTH CIRCUIT
ROBERT L. GRAY, MARY A. GRAY,
Petitioners-Appellants,
v. No. 96-9006
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee,
Appeal from the United States Tax Court (No. 4056-94)
Robert L. Gray and Mary A. Gray, Pro Se.
Ann B. Durney and Edward T. Perelmuter, Attorneys, Tax Division, Department of Justice, Washington, D.C., for Respondent-Appellee.
Before SEYMOUR, Chief Judge, KELLY and LUCERO, Circuit Judges.
SEYMOUR, Chief Judge. Robert L. Gray and his wife Mary appeal the Tax Court’s decision
upholding the Commissioner’s assertion of a deficiency of $65,336 in federal
income tax for the 1990 tax year. We affirm. 1
I.
On May 25, 1990, Mr. Gray and Phillips Petroleum Company settled his
claim against the company under the Age Discrimination in Employment Act
(ADEA), 29 U.S.C. §§ 621-634, for $221,000. Half of the settlement was
characterized as representing lost pension and insurance benefits, and the other
half as ADEA liquidated damages. Mr. Gray did not report the settlement amount
on his 1990 tax return, apparently believing that the amount was excluded from
gross income by Section 104(a)(2) of the Internal Revenue Code, which provides
an exclusion for “any damages received . . . on account of personal injuries or
sickness.” 26 U.S.C. § 104(a)(2). 2
After asserting a tax deficiency against Mr. Gray, the IRS in 1991 “abated
the tax previously assessed on the age discrimination proceeds.” Aplt.’s Br. at 17.
1 After examining the briefs and appellate record, this panel has determined unanimously that oral argument would not materially assist the determination of this appeal. See Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The cause is therefore ordered submitted without oral argument.
2 Section 104(a)(2) has been amended by the Small Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1605. We rely in this case upon the prior version.
-2- It thereafter informed Mr. Gray it was suspending administrative action on his
case pending the Supreme Court’s disposition of United States v. Burke, 504 U.S.
229 (1992), in which the Court ultimately held that backpay received under the
pre-1991 version of Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-
e17, was not excludable from gross income. 504 U.S. at 242. On January 20,
1994, the Commissioner issued a notice of deficiency based on Mr. Gray’s
improper exclusion of the settlement proceeds from gross income. Mr. Gray
challenged the deficiency determination in the Tax Court. In the meantime, the
Supreme Court decided Commissioner v. Schleier, 115 S. Ct. 2159 (1995), in
which it held that awards under the ADEA are not damages received “on account
of personal injuries,” and thus are not excludable. Id. at 2167. The Tax Court
held Mr. Gray’s case governed by Schleier.
II.
Mr. Gray appears to advance three principal arguments: (1) Schleier does
not apply because his settlement was for “lost pension and insurance benefits”
rather than back pay; (2) the settlement should not be taxable because such
settlements were not taxable under the law at the time of settlement; and (3) the
issuance of the 1991 abatement estops the Commissioner from asserting the
deficiency against the Grays.
-3- The Supreme Court’s holding in Schleier controls the outcome in this case.
In Schleier, the Court set out
two independent requirements that a taxpayer must meet before a recovery may be excluded under § 104(a)(2). First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is ‘based upon tort or tort type rights’; and second, the taxpayer must show that the damages were received ‘on account of personal injuries or sickness.’
115 S. Ct. at 2167. The Court held that an ADEA settlement for backpay and
liquidated damages did not satisfy either requirement, and thus no part of the
settlement was excludable under section 104(a)(2). Id. The analysis in Schleier
did not depend upon the characterization of the damages received, but rather on
the Court’s conclusion that the damages were not the result of a personal injury.
This conclusion applies with as much force to “lost pension and insurance
benefits” as it does to back wages. The settlement proceeds are not excludable
from gross income. 3
Mr. Gray contends that even if the settlement is taxable under current law,
the settlement should be excludable because it was nontaxable at the time he
entered into the settlement. In fact, he asserts that he would not have settled for
that amount but for the legal advice he received that the settlement was
nontaxable. Contrary to Mr. Gray’s suggestion, however, the law on this question
was far from clear at the time he entered into his settlement agreement. The IRS
3 Mr. Gray’s contention that the settlement amount is not “wages” does not resolve the question of whether it is excludable from income.
-4- has consistently maintained that Mr. Gray’s settlement is taxable. Although Mr.
Gray is correct that at the time of his settlement agreement several circuits had
held some elements of ADEA damage awards excludable from gross income, see,
e.g., Redfield v. Insurance Co. of No. Am., 940 F.2d 542 (9th Cir. 1991); Pistillo
v. Commissioner, 912 F.2d 145 (6th Cir. 1990); Rickel v. Commissioner, 900
F.2d 655 (3d Cir. 1990), the courts of appeals were in conflict on taxability of
ADEA awards, see Downey v. Commissioner, 33 F.3d 836, 839-40 (7th Cir. 1994)
(listing conflicting circuits on issue of whether ADEA liquidated damages are
taxable). Neither this circuit 4 nor the Supreme Court had spoken on the question.
It has long been recognized that the Commissioner has the power to reopen
his determination of taxes owing at any time within the statutory limitations
period. Burnet v. Porter, 283 U.S. 230, 231 (1931) (Commissioner may reopen
case and disallow a deduction after expressly deciding to allow it); Commissioner
v.
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UNITED STATES COURT OF APPEALS Tenth Circuit Byron White United States Courthouse 1823 Stout Street Denver, Colorado 80294 (303) 844-3157 Patrick J. Fisher, Jr. Elisabeth A. Shumaker Clerk Chief Deputy Clerk
January 13, 1997
TO: All recipients of the captioned order and judgment
RE: No. 96-9006, Gray v. CIR January 7, 1997
Please be advised of the following correction to the captioned decision:
The Order and Judgment filed January 7, 1997 is WITHDRAWN. Please substitute the following opinion.
The opinion is attached for your convenience.
Very truly yours,
Patrick Fisher, Clerk
Susie Tidwell Deputy Clerk
Encl. PUBLISH
UNITED STATES COURT OF APPEALS TENTH CIRCUIT
ROBERT L. GRAY, MARY A. GRAY,
Petitioners-Appellants,
v. No. 96-9006
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee,
Appeal from the United States Tax Court (No. 4056-94)
Robert L. Gray and Mary A. Gray, Pro Se.
Ann B. Durney and Edward T. Perelmuter, Attorneys, Tax Division, Department of Justice, Washington, D.C., for Respondent-Appellee.
Before SEYMOUR, Chief Judge, KELLY and LUCERO, Circuit Judges.
SEYMOUR, Chief Judge. Robert L. Gray and his wife Mary appeal the Tax Court’s decision
upholding the Commissioner’s assertion of a deficiency of $65,336 in federal
income tax for the 1990 tax year. We affirm. 1
I.
On May 25, 1990, Mr. Gray and Phillips Petroleum Company settled his
claim against the company under the Age Discrimination in Employment Act
(ADEA), 29 U.S.C. §§ 621-634, for $221,000. Half of the settlement was
characterized as representing lost pension and insurance benefits, and the other
half as ADEA liquidated damages. Mr. Gray did not report the settlement amount
on his 1990 tax return, apparently believing that the amount was excluded from
gross income by Section 104(a)(2) of the Internal Revenue Code, which provides
an exclusion for “any damages received . . . on account of personal injuries or
sickness.” 26 U.S.C. § 104(a)(2). 2
After asserting a tax deficiency against Mr. Gray, the IRS in 1991 “abated
the tax previously assessed on the age discrimination proceeds.” Aplt.’s Br. at 17.
1 After examining the briefs and appellate record, this panel has determined unanimously that oral argument would not materially assist the determination of this appeal. See Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The cause is therefore ordered submitted without oral argument.
2 Section 104(a)(2) has been amended by the Small Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1605. We rely in this case upon the prior version.
-2- It thereafter informed Mr. Gray it was suspending administrative action on his
case pending the Supreme Court’s disposition of United States v. Burke, 504 U.S.
229 (1992), in which the Court ultimately held that backpay received under the
pre-1991 version of Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-
e17, was not excludable from gross income. 504 U.S. at 242. On January 20,
1994, the Commissioner issued a notice of deficiency based on Mr. Gray’s
improper exclusion of the settlement proceeds from gross income. Mr. Gray
challenged the deficiency determination in the Tax Court. In the meantime, the
Supreme Court decided Commissioner v. Schleier, 115 S. Ct. 2159 (1995), in
which it held that awards under the ADEA are not damages received “on account
of personal injuries,” and thus are not excludable. Id. at 2167. The Tax Court
held Mr. Gray’s case governed by Schleier.
II.
Mr. Gray appears to advance three principal arguments: (1) Schleier does
not apply because his settlement was for “lost pension and insurance benefits”
rather than back pay; (2) the settlement should not be taxable because such
settlements were not taxable under the law at the time of settlement; and (3) the
issuance of the 1991 abatement estops the Commissioner from asserting the
deficiency against the Grays.
-3- The Supreme Court’s holding in Schleier controls the outcome in this case.
In Schleier, the Court set out
two independent requirements that a taxpayer must meet before a recovery may be excluded under § 104(a)(2). First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is ‘based upon tort or tort type rights’; and second, the taxpayer must show that the damages were received ‘on account of personal injuries or sickness.’
115 S. Ct. at 2167. The Court held that an ADEA settlement for backpay and
liquidated damages did not satisfy either requirement, and thus no part of the
settlement was excludable under section 104(a)(2). Id. The analysis in Schleier
did not depend upon the characterization of the damages received, but rather on
the Court’s conclusion that the damages were not the result of a personal injury.
This conclusion applies with as much force to “lost pension and insurance
benefits” as it does to back wages. The settlement proceeds are not excludable
from gross income. 3
Mr. Gray contends that even if the settlement is taxable under current law,
the settlement should be excludable because it was nontaxable at the time he
entered into the settlement. In fact, he asserts that he would not have settled for
that amount but for the legal advice he received that the settlement was
nontaxable. Contrary to Mr. Gray’s suggestion, however, the law on this question
was far from clear at the time he entered into his settlement agreement. The IRS
3 Mr. Gray’s contention that the settlement amount is not “wages” does not resolve the question of whether it is excludable from income.
-4- has consistently maintained that Mr. Gray’s settlement is taxable. Although Mr.
Gray is correct that at the time of his settlement agreement several circuits had
held some elements of ADEA damage awards excludable from gross income, see,
e.g., Redfield v. Insurance Co. of No. Am., 940 F.2d 542 (9th Cir. 1991); Pistillo
v. Commissioner, 912 F.2d 145 (6th Cir. 1990); Rickel v. Commissioner, 900
F.2d 655 (3d Cir. 1990), the courts of appeals were in conflict on taxability of
ADEA awards, see Downey v. Commissioner, 33 F.3d 836, 839-40 (7th Cir. 1994)
(listing conflicting circuits on issue of whether ADEA liquidated damages are
taxable). Neither this circuit 4 nor the Supreme Court had spoken on the question.
It has long been recognized that the Commissioner has the power to reopen
his determination of taxes owing at any time within the statutory limitations
period. Burnet v. Porter, 283 U.S. 230, 231 (1931) (Commissioner may reopen
case and disallow a deduction after expressly deciding to allow it); Commissioner
v. Wilson, 60 F.2d 501, 503 (10th Cir. 1932) (“[The Commissioner] has the
power, within the period of limitations, to make such reexaminations,
redeterminations, and reassessments as may be necessary to collect the entire
deficiency.”); Harriton v. Lucas, 41 F.2d 429, 430 (D.C. Cir. 1930) (same);
McIlhenny v. Commissioner, 39 F.2d 356 (3rd Cir. 1930) (same as Porter); Austin
Co. v. Commissioner, 35 F.2d 910, 912 (6th Cir. 1929) (Commissioner is not
4 The only contemporaneous case we have found in this circuit interpreting the scope of Section 104(a)(2) is Wulf v. City of Wichita, 883 F.2d 842, 873 (10th Cir. 1989), in which we held a damage award for termination in violation of the First Amendment to be excludable because it arose from a “tort-type claim.”
-5- estopped from redetermining taxes owed even when the prior determination was
based on Commissioner’s legal error.).
Finally, Mr. Gray apparently suggests that regardless of the applicable law,
the IRS’ 1991 abatement of taxes owed on the settlement estops the
Commissioner from now asserting a deficiency. On the contrary, it is settled law
that the issuance of an abatement does not prevent the Commissioner from
redetermining or reassessing a tax deficiency, so long as the Commissioner acts
before the expiration of the applicable statute of limitations. Service Bolt & Nut
Co. v. Commissioner, 724 F.2d 519, 524 (6th Cir. 1983) (“[T]he abatement of an
assessment is not a binding action that can estop the Commissioner from
reassessing a deficiency.”); Baumgartner v. Commissioner, 21 B.T.A. 623, 625
(1930) (same); Zeile v. Commissioner, 20 B.T.A. 1039, 1040 (1930) (“That the
Commissioner is not estopped from reasserting a deficiency, theretofore abated by
him, is now so well established by the decisions of this Board, as well as by
appellate courts, that we deem it unnecessary to cite authorities.”). In essence, an
abatement is a unilateral statement by the Commissioner that his collectors will
not currently seek payment. Generally speaking, therefore, an abatement does not
create a right in the taxpayer absent an explicit agreement between the taxpayer
and the Commissioner. See, e.g., McIlhenny, 39 F.2d at 358; L. Loewy & Son,
Inc. v. Commissioner, 31 F.2d 652, 654 (2d Cir. 1929); Baumgartner, 21 B.T.A.
at 625. Mr. Gray filed his 1990 return on April 11, 1991. The Commissioner
issued the notice of deficiency January 20, 1994, within the three year limit.
-6- We AFFIRM the Tax Court’s ruling in favor of the Commissioner.
-7-