Johnson v. United States

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
AUG 29 2003
FOR THE TENTH CIRCUIT
PATRICK FISHER
Clerk
RODELL JOHNSON,
Plaintiff-Counter-
Defendant-Appellant,
v. No. 02-1330
(D.C. No. 01-WY-1107-CB (PAC))
UNITED STATES OF AMERICA, (D. Colo.)
Defendant-Counter-
Claimant-Appellee.
ORDER AND JUDGMENT *
Before KELLY , ANDERSON , and O’BRIEN , Circuit Judges.
After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument.
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
In this appeal we determine whether front and back pay awarded in an
employment discrimination suit filed under the Americans with Disabilities Act
(ADA), 42 U.S.C. §§ 12101-12213, are “damages . . . received . . . on account of
personal physical injuries or physical sickness” within the meaning of § 104(a)(2)
of the Internal Revenue Code, 26 U.S.C. § 104(a)(2), and therefore excludable
from gross income. The district court granted the United States’ motion for
summary judgment, and held that the front and back pay awarded under the ADA
did not meet the “personal physical injuries” exclusion from income under
§ 104(a)(2). Johnson v. United States , 228 F. Supp. 2d 1218, 1223-24 (D. Colo.
2002). The taxpayer, Rodell Johnson, appeals. Exercising jurisdiction under
28 U.S.C. § 1291, we affirm. 1
The relevant facts are not in dispute. Mr. Johnson was employed as a guard
at a Colorado juvenile correctional institution under the control of the State of
Colorado and its Department of Corrections. He was injured while restraining a
juvenile inmate. These injuries precluded him from performing his work as a
guard. Instead of accommodating him under the ADA with another job he could
perform, the State of Colorado terminated his employment. He sued the State of
1
As an initial matter, we note that neither party has complied with
Fed. R. App. P. 30 and 10th Cir. R. 30.1, 30.2 and 10.3. Although “[t]he court
need not remedy any failure of counsel to provide an adequate appendix,”
10th Cir. R. 30.1(A)(3), we have done so in order to decide this appeal. We
remind both parties of their duty to follow this court’s rules.
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Colorado in state court alleging discrimination under the ADA for failing to
accommodate his injuries and for terminating his employment. Based on a jury
verdict in Mr. Johnson’s favor, the trial court entered judgment awarding him
$103,300 for back pay, $190,100 for front pay, $50,000 for emotional distress,
pain, suffering and mental anguish, $8,304 for prejudgment interest and $70,127
for attorney’s fees and costs. The Colorado Court of Appeals affirmed.
In 1999, the State of Colorado paid Mr. Johnson the ADA damages
awarded to him, but withheld federal income tax of $90,373 and paid that money
to the Internal Revenue Service (IRS). Of that amount, $75,694 applied to the tax
liability on the back and front pay portions of the award. Mr. Johnson claimed a
refund on his 1999 tax return for $75,694, plus interest and attorney’s fees. He
asserted that he received compensatory damages for a work-related injury
excludable from taxable income under § 104.
The IRS informed Mr. Johnson that his 1999 tax return had been selected
for audit. An IRS auditor orally informed Mr. Johnson that the front and back pay
damages were not excludable from income under § 104 and he therefore was not
entitled to a refund. When Mr. Johnson received no formal IRS rejection of his
refund within six months, he filed suit in federal district court seeking a refund
and attorney’s fees and costs. See 26 U.S.C. §§ 7422(a), 6532(a)(1); 28 U.S.C.
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§§ 1346(a)(1), 2412. Less than one month later, the IRS erroneously refunded the
contested amount plus interest.
After issuing the refund, the United States moved to dismiss the suit for
refund, asserting the district court lacked subject matter jurisdiction because the
case was now moot. The district court denied the motion and ordered the United
States to file a counterclaim or the court would enter judgment in Mr. Johnson’s
favor. The United States filed the counterclaim pursuant to 26 U.S.C. § 7405(b)
seeking to recover the refund and interest. In the counterclaim, the United States
alleged the IRS issued the refund by mistake. The United States later filed a
motion for summary judgment, arguing the front and back pay damages sought to
compensate Mr. Johnson for his lost wages from his employer’s discriminatory
act, not for any physical injury, and therefore the damages were not excludable
from income. Also, the United States argued the refund was made by mistake and
the United States could recover the refund under § 7405(b). The district court
granted the summary-judgment motion in a well-reasoned decision. Accordingly,
on July 12, 2002, the district court entered judgment in favor of the United States
in the amount of the refund plus interest. Mr. Johnson appealed. On July 25,
2002, the United States filed a motion to amend the judgment, seeking to have
interest accrue in accordance with 26 U.S.C. §§ 6602, 6621, rather than at the rate
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specified in the judgment. The district court granted the motion to amend and
amended its judgment.
We review the district court’s grant of summary judgment
de novo , applying the same legal standard used by the district court.
Summary judgment is appropriate “if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a
matter of law.” Fed. R. Civ. P. 56(e). When applying this standard,
we view the evidence and draw reasonable inferences therefrom in
the light most favorable to the nonmoving party.
Simms v. Okla. ex rel. Dep’t of Mental Health & Substance Abuse Servs. ,
165 F.3d 1321, 1326 (10th Cir. 1999) (citation omitted).
Section 7405(b) permits the United States to recover erroneously paid tax
refunds. See also United States v. Wurts , 303 U.S. 414, 415 (1938) (recognizing
government, by appropriate action, can recover funds its agents erroneously paid).
For the United States to recover the alleged erroneous refund, it must show a
refund made to the taxpayer, the amount of the refund, the timely commencement
of the § 7405(b) recovery action, and no entitlement by the taxpayer to the refund
the United States seeks to recover. See United States v. Daum , 968 F. Supp.
1037, 1041-42 (W.D. Pa. 1997). Here, it is undisputed that the IRS paid
Mr. Johnson the tax refund in the amount he requested and that the United States
timely commenced its counterclaim. Thus, the remaining question is whether
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Mr. Johnson was entitled to the refund, or, in other words, whether he could
exclude the ADA front and back pay award from gross income.
The Internal Revenue Code broadly defines gross income as “all income
from whatever source derived.” 26 U.S.C. § 61(a). “Thus, any gain constitutes
gross income unless the taxpayer demonstrates that it falls within a specific
exemption.” Brabson v. United States , 73 F.3d 1040, 1042 (10th Cir. 1996).
Unlike the broad, sweeping inclusion of § 61(a), exclusions from income are
narrowly construed. See Comm’r v. Schleier , 515 U.S. 323, 327-28 (1995).
“[E]xemptions from taxation are not to be implied; they must be unambiguously
proved.” United States v. Wells Fargo Bank , 485 U.S. 351, 354 (1988); see Taggi
v. United States , 35 F.3d 93, 95 (2d Cir. 1994) (placing burden on taxpayer to
show he qualifies for exclusion).
Mr. Johnson argues his ADA front and back pay award is excluded from
§ 61(a) by § 104(a)(2). Section 104(a)(2) excludes from gross income “the
amount of any damages . . . received (whether by suit or agreement and whether
as lump sums or as periodic payments) on account of personal physical injuries or
physical sickness.” Although the statute does not provide any further definition,
the regulations provide that “[t]he term ‘damages received . . .’ means an amount
received . . . through prosecution of a legal suit or action based upon tort or tort
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type rights . . . .” 26 C.F.R. § 1.104-1(c). Based on the language of the statute,
the text of the regulation and prior case law, the Supreme Court set forth
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.”
Schleier , 515 U.S. at 337. 2
The parties did not argue before the district court and do not argue before
this court that the front and back pay were not received as part of a tort-like
claim. We, like the district court, assume without deciding that Mr. Johnson
received the damages under a tort-like claim. See Johnson , 228 F. Supp. 2d
at 1222 (noting that if it were a contested issue, “the ADA offers a broad range of
remedies” that probably satisfy requirement that recovery is based on tort-like
claim); see also Phillips v. Comm’r , 74 T.C.M. (CCH) 187 (1997) (finding that
because ADA provides for broad range of tort-like remedies, taxpayer met first
prong and established existence of underlying tort-like cause of action).
Next, we consider whether the damages Mr. Johnson received were
“on account of personal physical injuries or physical sickness.” 26 U.S.C.
§ 104(a)(2); see Schleier , 515 U.S. at 330. Mr. Johnson argues that due to his
2
Section 104(a)(2) was amended after the Schleier decision to require
“personal physical injuries or physical sickness.” 26 U.S.C. § 104(a)(2)
(emphasis added).
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physical injuries he was discriminated against and terminated, and his physical
injuries are therefore inextricably intertwined with the discrimination he suffered.
Without the physical injuries, he maintains he would have had no basis for an
ADA suit.
“[A] causal link must exist between the personal injury and the damages
received.” Fabry v. Comm’r , 223 F.3d 1261, 1266 n.16 (11th Cir. 2000) (citing
Schleier ); see also Gray v. Comm’r , 104 F.3d 1226, 1227 (10th Cir. 1997) (“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.”). The causal link Mr. Johnson suggests was rejected
by O’Gilvie v. United States , 519 U.S. 79, 82-83 (1996). Id. (rejecting causal link
of “‘but for the personal injury, there would be no lawsuit, and but for the
lawsuit, there would be no damages’”). Instead, O’Gilvie requires a stronger
causal connection, whereby § 104(a)(2) applies “only to those personal injury
lawsuit damages that were awarded by reason of, or because of, the personal
injuries.” O’Gilvie , 519 U.S. at 83.
Here, the actual cause of the loss of income and the ADA action was the
unlawful termination, not the personal physical injury. See Allred v. Solaray,
Inc. , 971 F. Supp. 1394, 1398 (D. Utah 1997) (“[A] claim of discrimination under
the ADA is not a claim for injury to the person, but an injury to his rights or
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reputation.”). Although the discrimination caused both injury and loss of wages,
the discrimination was not directly linked to Mr. Johnson’s personal physical
injury. See Schleier , 515 U.S. at 330; Gerbec v. United States , 164 F.3d 1015,
1022 (6th Cir. 1999) (recognizing in ERISA case that damages were received for
firing and personal injury, but personal injury did not give rise to lost wages).
We therefore agree with the district court that there is no direct causal link
between Mr. Johnson’s physical injuries and his front and back pay award under
the ADA. Johnson , 228 F. Supp. 2d at 1223. “Instead, they are one step
removed, with the discriminatory discharge of [Mr. Johnson] separating them.”
Id. See generally Broedel v. Comm’r , 81 T.C.M. (CCH) 1732 (2001) (including
in gross income entire amount received in settlement of ADA claim; noting “the
fact that the amount [received] was based on the amount [taxpayer] would have
received had he continued working another year and a half points in the direction
of payment for reasons other than personal injury or sickness”). The amount of
back and front pay awarded was independent of Mr. Johnson’s personal physical
injuries. See Schleier , 515 U.S. at 330. Thus, Mr. Johnson received the front and
back pay award because of his employer’s discriminatory conduct, not “on
account of personal physical injury.” 26 U.S.C. § 104(a)(2).
Mr. Johnson faults the district court for failing to discuss the facts that he
used the ADA as a vehicle to obtain compensation for his physical injuries
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because the State of Colorado provided no direct remedy for the injuries and that
he did not receive the typical ADA remedy of employment reinstatement. The
damages awarded were not “on account of personal physical injuries” merely
because Mr. Johnson was not reinstated and sovereign immunity precluded
a negligence suit against the State of Colorado. Rather, the damages were paid to
compensate him for the wages he lost due to his former employer’s discriminatory
decision to terminate his employment. They were not paid to compensate him for
the injury itself.
Mr. Johnson also argues the front and back pay is excludable from gross
income because the Public Employee’s Retirement Association of Colorado did
not treat them as salary. “[F]ederal tax consequences[, however,] . . . are solely
a matter of federal law.” Brabson , 73 F.3d at 1044 (citing cases). Thus, the State
of Colorado’s treatment has no relevance to Mr. Johnson’s federal tax liability.
Accordingly, we, like the district court, conclude the front and back pay
damages awarded to Mr. Johnson do not constitute “damages . . . received . . . on
account of personal physical injuries or physical sickness” under § 104(a)(2).
Also, we conclude the district court correctly decided the United States was
entitled under § 7405(b) to recover the tax refund paid to Mr. Johnson.
Mr. Johnson argues the district court erred in accepting the United States’
evidence of his alleged indebtedness when the IRS had not sent him a deficiency
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letter. The IRS had three years to issue a notice of deficiency. See 26 U.S.C.
§ 6501(a). Mr. Johnson chose to proceed with his refund suit rather than wait for
the notice of deficiency. He cites no authority, and we did not find any,
precluding the IRS from filing a counterclaim before issuing a notice of
deficiency. Indeed, this court recognized in United States v. C & R Investments,
Inc. , 404 F.2d 314, 315 (10th Cir. 1968), that the IRS may seek recovery from
a taxpayer by proceeding under § 7405 or by a deficiency collection proceeding.
Thus, the district court did not err in accepting evidence presented by the United
States of his indebtedness despite the IRS’s failure, at that time, to have issued
a notice of deficiency.
Mr. Johnson contends the United States’ motion to amend the trial court’s
judgment was untimely. Because he did not file a notice of appeal from the grant
of the motion to amend or move to amend his notice of appeal, this court
considers only the judgment entered on July 12, 2002. See Jernigan v. Stuchell ,
304 F.3d 1030, 1031 (10th Cir. 2002) (citing Fed. R. App. P. 4(a)(4)(B)(ii)).
Thus, we have no jurisdiction to review the district court’s order granting the
motion to amend. Even if we did have jurisdiction, the United States did file
a timely motion to amend. See Fed. R. Civ. P. 59(e), 6(a).
Because we affirm the district court’s decision, we need not address
Mr. Johnson’s argument that that court erred in failing to award him attorney’s
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fees or interim interest on money withheld by the IRS. Finally, we reject
Mr. Johnson’s remaining arguments as legally meritless.
The judgment of the district court is AFFIRMED.
Entered for the Court
Stephen H. Anderson
Circuit Judge
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