IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
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No. 97-60736
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NEIL D. LUBART; VY LUBART
Petitioners-Appellants,
VERSUS
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
_________________________
Appeal from the Decision
of the United States Tax Court
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September 28, 1998
Before DeMOSS, PARKER, and DENNIS, Circuit Judges.
PER CURIAM:
Petitioner Neil D. Lubart appeals the Tax Court’s summary
judgment against him on his claim that $74,985 of income received
upon his resignation constituted payment on account of sickness or
personal injury excludable under section 104(a)(2) of the Internal
Revenue Code. Because the allegations in the pleadings demonstrate
that IBM offered the payment in lieu of damages and not to settle
a claim for personal injury, we affirm.
A.
Lubart was a successful engineer employed with International
Business Machines Corp. (IBM) until 1992. At some point in 1992,
Lubart became eligible to participate in IBM’s Modified and
Extended Individual Transition Option Program (ITO II). This
program was 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 Lubart agreed
as follows:
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
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.
...
2
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.
Lubart claims that he was coerced into resigning, but he did
not complain of this or of any other tort claim 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 on July 31, 1992, apparently without doing any
of these things. He received a lump sum special incentive payment
of $74,985 calculated, like other ITO II payments, on the basis of
his years of service and rate of pay. IBM withheld federal income
taxes, social security taxes, and Medicare taxes from the payment.
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 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.
3
The year after Lubart left IBM, his wife was diagnosed with
Alzheimer’s disease. Although Lubart had never suffered from
depression before, after these events occurred he fell into a deep
depression and sought treatment from three doctors.
When he filed his 1992 income tax return, Lubart excluded the
special incentive payment from his gross income. He claimed on a
Form 8275, “Disclosure Statement,” that the income was a payment
for personal injury excludable from income under Section 104(a)(2)
of the Internal Revenue Code as a payment on account of sickness or
personal injury. See 26 U.S.C. § 104(a)(2) (1998). The
Commissioner assessed a deficiency of $22,553. Shortly thereafter,
Lubart joined a suit with forty other taxpayers who had received
early retirement payments from IBM. Because most of those
taxpayers, unlike Lubart, had suffered nothing that might be
interpreted as “personal injury” for which they might have had a
claim against IBM, the Tax Court severed Lubart’s case.
On May 22, 1997, the Commissioner filed a motion for summary
judgment. In granting the motion, the Tax Court noted 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 Lubart had not asserted any claim at the time he signed the
release, because the release was a standard document offered to all
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employees, because the amount of the payment was calculated based
on Lubart’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 court noted that the
release makes no attempt to allocate the payment between severance
pay and personal injuries, and that Lubart 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
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. Rule
121(d).
Lubart 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
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IBM intended these payments solely as severance pay. Lubart does
not meet his burden of providing specific facts showing there is a
genuine issue of fact for trial, however. Lubart 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 evidence to the contrary,
however, Lubart 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.
Lubart’s case presents no novel issues. In Webb v. CIR, 71
T.C.M. (CCH) 2004 (1996), the Tax Court considered 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 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 court also cited the factors
considered by the court below in this case. Lubart’s claim suffers
the same defects. Like the plaintiff in Webb, Lubart essentially
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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.
Favorable tax treatment has even been denied in the Second
Circuit when part of a severance payment was expressly conditioned
upon the release of claims. Under Lubart’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 the result in Taggi v.
United States, 35 F.3d 93, 96-97 (2d Cir. 1994). In that case, the
taxpayer took early retirement under an AT&T program that offered
two incentive payment options. Under one, the 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. In order 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
2
The Supreme Court has held that 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, Lubart’s
payment could only be excluded to the extent it settled a potential state
law emotional distress claim. Because Lubart would have had difficulty proving
the kind of outrageous conduct required by Texas law, it is especially unlikely
that the special incentive payment was intended to settle such a claim.
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to bring a claim under the Age Discrimination in Employment Act, 29
U.S.C. §§ 621-634 (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 Section 104(a)(2).
Although Taggi’s claim was much stronger than Lubart’s, the
Second Circuit denied section 104(a)(2) treatment. Id. at 96-97.
It cited Treasury Regulation § 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.” 26 C.F.R. § 1.104-1(c).
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 section
104(a)(2) were construed to encompass releases of potential
unspecified future claims, as Lubart recommends, manufacturing
section 104(a)(2) tax treatment would be simple.
While the parameters for section 104(a)(2) treatment remain
somewhat undefined, Lubart’s case obviously does not fit within
them. Because Lubart has alleged no facts to contradict IBM’s
obvious intent to provide severance pay, the decision of the Tax
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Court is AFFIRMED.
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