Filed: Oct. 22, 1998
Latest Update: Mar. 02, 2020
Summary: IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 97-60732 Summary Calendar _ JOSEPH J. GAJDA and LILLIAN A. GAJDA, Petitioners-Appellants, VERSUS COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. _ Appeal from a Decision of the United States Tax Court _ August 7, 1998 Before JONES, SMITH, and STEWART, Circuit Judges. JERRY E. SMITH, Circuit Judge:* Joseph Gajda, who files tax returns jointly with his wife Lillian Gajda, appeals the Tax Court’s summary judgment on Joseph’s c
Summary: IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 97-60732 Summary Calendar _ JOSEPH J. GAJDA and LILLIAN A. GAJDA, Petitioners-Appellants, VERSUS COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. _ Appeal from a Decision of the United States Tax Court _ August 7, 1998 Before JONES, SMITH, and STEWART, Circuit Judges. JERRY E. SMITH, Circuit Judge:* Joseph Gajda, who files tax returns jointly with his wife Lillian Gajda, appeals the Tax Court’s summary judgment on Joseph’s cl..
More
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
No. 97-60732
Summary Calendar
_______________
JOSEPH J. GAJDA and LILLIAN A. GAJDA,
Petitioners-Appellants,
VERSUS
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
_________________________
Appeal from a Decision of
the United States Tax Court
_________________________
August 7, 1998
Before JONES, SMITH, and STEWART, Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
Joseph Gajda, who files tax returns jointly with his wife
Lillian Gajda, appeals the Tax Court’s summary judgment on Joseph’s
claim that $91,690 of income received upon his resignation from
employment constituted payment on account of sickness or personal
injury excludable under section 104(a)(2) of the Internal Revenue
Code. Because the pleadings demonstrate that the employer offered
the payment in lieu of damages and not to settle a claim for
personal injury, we affirm.
A.
Gajda was an engineer employed with International Business
Machines Corp. (“IBM”) for thirty-two years. At some point in
1993, he became eligible to participate in IBM’s Modified and
Extended Individual Transition Option Program (“ITO II”), which had
been implemented as part of IBM’s effort to reduce the size of its
workforce and was offered to all employees who met certain age and
job category requirements.
Under the voluntary program, employees could choose to accept
a lump-sum payment in return for their voluntary resignation and
release of all potential claims against IBM arising out of their
employment or its termination. The agreement provided, in relevant
part, that Gajda agreed
to release International Business Machines corporation
(hereinafter, IBM), from all claims, demands, actions or
liabilities you may have against IBM of whatever kind,
including but not limited to those which are related to
your employment with IBM or the termination of that
employment. You agree this also releases from liability
IBM’s agents, directors, officers, employees,
representatives, successors and assigns (hereinafter
“those associated with IBM”). You agree that you have
executed this release on your own behalf, and also on
behalf of any heirs, agents, representatives, successors
and assigns that you may have now or in the future. You
also agree that this release covers but is not limited to
claims arising from the Age Discrimination in Employment
Act of 1967, as amended, Title VII of the Civil Rights
Act of 1964, as amended, and any other federal or state
law dealing with discrimination in employment on the
2
basis of sex, race, national origin, religion, disability
or age. You also agree that this release includes claims
based on theories of contract or tort, whether based on
common law or otherwise.
...
1. The benefits provided pursuant to the ITO Program
constitute consideration for this release, in that these
are benefits to which you would not have been entitled
had you not signed the release.
...
3. This release does not waive any claims which you may
have that arise after the date you sign this release.
...
6. In the event of a rehire by IBM or any of its
subsidiaries as a regular employee, you understand that
IBM reserves the right to require repayment of a prorated
portion of the ITO II Program payment. The amount of the
repayment will be based on the number of weeks off the
IBM payroll compared with the number of weeks salary used
to calculate your payment.
Gajda claims that he was pressured into resigning, but he did
not complain of this or of anything else to company officers,
despite a clause in the contract suggesting that employees consider
the offer carefully, consult with their attorneys, and discuss any
tort claims with the company.1 He signed the release in 1993,
1
The relevant portion of the release agreement read as follows:
IBM ADVISES YOU TO CONSULT AN ATTORNEY BEFORE YOU SIGN THIS
RELEASE
If you feel that you are being coerced to sign this release or
that your signing would for any reason not be voluntary, or
you believe the process by which you have been offered this
release or the payment in exchange for this release is
discriminatory, you are encouraged to discuss this with your
(continued...)
3
apparently without doing any of these things, although he was given
at least forty-five days to consider the offer. He received a lump
sum special incentive payment of $91,690 calculated, like other
ITO II payments, on the basis of his years of service and rate of
pay. IBM withheld federal income, social security, and Medicare
taxes. After these events occurred, Gajda fell into a deep
depression and sought treatment from three doctors.
When he filed his 1993 income tax return, Gajda excluded the
special incentive payment from gross income. He claimed on a
Form 8275, “Disclosure Statement,” that the income was a payment
for “age discrimination and other potential tort claims” excludable
from income under 26 U.S.C. § 104(a)(2) as a payment on account of
sickness or personal injury. The Commissioner assessed a
deficiency of $33,343.
Gajda joined a suit with seventeen other taxpayers who had
received early retirement payments from IBM. Because most of those
taxpayers, unlike Gajda, had suffered nothing that might be
interpreted as “personal injury” for which they might have had a
claim against IBM, the Tax Court severed Gajda’s case.
(...continued)
management or Personnel before signing this release. After
reviewing the release with your attorney, you can discuss
concerns you have with your manager or your attorney can
contact legal counsel at your location. You should thoroughly
review and understand the effects of the release before
signing it.
A footnote accompanying this paragraph described the potential discrimination
claims an employee might have, including claims under the ADEA and state and
local law.
4
The Tax Court granted summary judgment in favor of the
Commissioner, noting that the intent of the employer would
determine the treatment of the payment. See Knuckles v.
Commissioner, 349 F.2d 610, 612 (10th Cir. 1965). It found that
the payment was in the nature of severance pay rather than of
compensation for personal injury, because Gajda had not asserted
any claim at the time he signed the release, because the release
was a standard document offered to all employees, because the
amount of the payment was calculated based on Gajda’s salary and
number of years of service, and because the agreement required
repayment of a pro rata portion of the incentive payment depending
on the employee’s length of time between the resignation and the
rehire. Finally, the Tax Court noted that the release makes no
attempt to allocate the payment between severance pay and personal
injuries, and that Gajda had offered no facts upon which an
allocation could be based.
B.
Summary judgment is appropriate “if the pleadings, answers to
interrogatories, depositions, admissions, and any other acceptable
materials, together with the affidavits, if any show that there is
no genuine issue as to any material fact and that a decision may be
rendered as a matter of law.” TAX COURT RULES OF PRACTICE AND PROCEDURE
121(b). The moving party bears the burden of proving that there is
5
no genuine issue of material fact, and factual inferences are
viewed in the light most favorable to the nonmovant. United States
v. Diebold, Inc., 369 U.S. 654, 655 (1962). The opposing party
cannot rest upon mere allegations or denials, but must set forth
specific facts showing there is a genuine issue for trial. TAX
COURT RULES OF PRACTICE AND PROCEDURE 121(d).
Gajda argues that IBM’s intent is a question of fact and that
the aspects of the agreement noted by the Tax Court do not prove
that IBM intended these payments solely as severance pay. Gajda
does not meet his burden of providing specific facts showing there
is a genuine issue of fact for trial, however.
Gajda is correct that the factors considered by the Tax Court
do not conclusively demonstrate that IBM intended the payment as
severance pay in the face of evidence to the contrary. For such
evidence to the contrary, however, Gajda provides only the
irrelevant evidence of his subsequent depression and his
unsubstantiated allegations that IBM forced him to sign the
agreement. These allegations do not contradict the obvious
conclusion from the language of the agreement, the nature of the
program, and the calculation of the payment itself, that IBM
intended the payment as compensation of wages lost upon early
retirement and not to settle personal injury claims.
Gajda’s case presents no novel issues. In Webb v. Com-
missioner, 71 T.C.M. 2004 (1996), the Tax Court considered
6
almost identical facts: A taxpayer who retired early under the IBM
ITO program, suffered mental anguish after the resignation, and
then claimed for the first time that he signed the release under
protest. The Tax Court characterized the payment as severance,
noting that under the taxpayer’s description of the facts, “the
Release itself was the cause of the injury.” Id. The Tax Court
also cited the same factors it considered in the instant case.
Gajda’s claim suffers the same defects. Like the plaintiff in
Webb, Gajda essentially argues that he has an ADEA or emotional
distress claim based on the fact that IBM forced him to resign and
sign the release.2 Because the wrongful act leading to his
subsequent depression did not occur prior to the signing of the
release, the simultaneous special incentive payment could not have
been made to resolve an existing claim for personal injury.
Under Gajda’s argument, the mere fact that IBM foresaw
lawsuits arising out of the ITO II program meant that the payment
was in part a settlement of those potential future claims. This
argument is contradicted by Taggi v. United States, 35 F.3d 93, 96-
97 (2d Cir. 1994).
In Taggi, the taxpayer took early retirement under an AT&T
program that offered two incentive payment options. Under one, the
2
Damages under the ADEA are not excludable under § 104(a)(2) because they
compensate lost wages and impose punitive damages, but do not contain an
emotional distress or other personal injury component. Commissioner v. Schleier,
515 U.S. 323, 326 (1995). Accordingly, Gajda’s payment could only be excluded
to the extent it settled a potential state-law emotional distress claim.
7
taxpayer would have received three percent of his base pay
multiplied by the number of years he had worked at AT&T. Under the
second, he would receive five percent. To receive the higher
payment, he had to sign a Separation Agreement and Release, which
claimed to be a “full legal release.” Id. at 94. After he
resigned, he attempted to bring a claim under the ADEA. When this
claim was dismissed because of the Separation Agreement, the
taxpayer made a refund claim asking that the incentive payment be
treated as a payment for personal injury under § 104(a)(2).
Although Taggi’s claim was much stronger than Gajda’s, the
court denied § 104(a)(2) treatment. Id. at 96-97. It cited
26 C.F.R. § 1.104-1(c), which provides that damages received on
account of personal injuries or sickness are those received
“through prosecution of a legal suit or action based upon tort or
tort type rights, or through a settlement agreement entered into in
lieu of such prosecution.” The court noted that exclusions from
income are to be defined narrowly and that parties must be
prohibited from creating contrived “settlement agreements” to avoid
taxation of the proceeds. In order to prevent such contrived
settlements, the courts must require the presence of an actual
dispute. If § 104(a)(2) were construed to encompass releases of
potential unspecified future claims, as Gajda recommends,
manufacturing § 104(a)(2) tax treatment would be simple.
While the parameters for § 104(a)(2) treatment remain somewhat
8
undefined, Gajda’s case obviously does not fit within them.
Because Gajda has alleged no facts to contradict IBM’s obvious
intent to provide severance pay, the decision of the Tax Court is
AFFIRMED.
9
