IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
F I L E D
No. 06-40526 August 17, 2007
Charles R. Fulbruge III
Clerk
LINDA R. BENAVIDES; PAUL A. BENAVIDES; and DAVID R.
BENAVIDES
Plaintiffs-Appellants
v.
UNITED STATES OF AMERICA
Defendant-Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before HIGGINBOTHAM, WIENER, and PRADO, Circuit Judges.
Wiener, Circuit Judge:
Plaintiffs-Appellants Linda Benavides, Paul Benavides, and David
Benavides (collectively, “the Taxpayers”) brought suit against the government,
seeking a refund for income taxes paid on a jury award of punitive damages
received in a state wrongful death action. The district court granted the
government’s motion for summary judgment, holding that the Taxpayers could
not exclude their punitive damages award from gross income under 26 U.S.C.
§104(a) and (c). The Taxpayers appeal. We agree with the district court that 26
U.S.C. § 104(c) does not apply to the Taxpayers’ punitive damages award, so we
affirm.
I. FACTS & PROCEEDINGS
No. 06-40526
A. Facts
In March 1989, Rogelio (Roger) Benavides was working as a shift operator
for American Chrome & Chemical (“ACC”)1 when he fell through an improperly
maintained tank lid and into a tank of an extremely caustic chemical. He died
as a result of the accident.
Roger was survived by his wife, Linda, and their two minor children, Paul
and David. Linda filed for and received workers’ compensation death benefits
from Roger’s employer, which subscribed to the Texas Workers’ Compensation
insurance system. Linda also filed a wrongful death suit on behalf of herself and
the minor children against ACC in state court. The suit sought only punitive
damages, because, although a plaintiff ordinarily may recover both “actual
damages” (compensatory) and “exemplary damages” (punitive) in a wrongful
death action under Texas law,2 the Texas Workers’ Compensation Act (“WCA”)
limits the recovery available in wrongful death actions to only punitive damages
when the decedent was covered by workers’ compensation insurance.3 As Roger
had not waived his coverage under the WCA,4 Linda and the children were
limited to recovering punitive damages in their wrongful death action.
After some ten years of litigation, the Taxpayers prevailed at a jury trial
in March 1999. The jury found that gross negligence caused Roger’s death, and
it awarded the Taxpayers $25 million in punitive damages. Prior to the entry
1
ACC changed its name to Elementis Chromium, Inc. in January of 1998.
2
TEX. CIV. PRAC. & REM. CODE ANN. §§ 71.002(a), 71.009 (Vernon 1997).
3
TEX. LAB. CODE §§ 408.001(a, b) (Vernon 2005). Section 408.001(b) reads: “This
section does not prohibit the recovery of exemplary [punitive] damages by the surviving spouse
or heirs of the body of a deceased employee whose death was caused by an intentional act or
omission of the employer or by the employer’s gross negligence.”
4
In Texas, the employee, at the time of his employment, has the right to waive coverage
under the WCA and retain his right to bring a common law action against his employer for
work-related injuries.
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No. 06-40526
of judgment on the jury’s verdict, the Taxpayers accepted a settlement that
reduced the punitive damages award and apportioned the recovery 50% to Linda
and 25% to each child.5 The Taxpayers paid federal income taxes on the award
for 1999. In January 2001, Linda filed a refund claim for herself in the amount
of $1,341,355 and for her children, Paul and David, in the amounts of $664,312
and $665,921, respectively. The Internal Revenue Service denied the refunds.
B. Proceedings
In October 2004, the Taxpayers filed suit in the district court challenging
the denial of their refund claims. They asserted that they were entitled to a
refund because, under 26 U.S.C. § 104(c) (Internal Revenue Code § 104(c)), they
could exclude their punitive damages award from their gross income. Although
gross income normally includes punitive damages,6 § 104(c) creates an exception
by exempting punitive damages obtained in wrongful death actions with respect
to which applicable state law limits recovery to punitive damages. The
Taxpayers contended that the punitive damages in their case fell within this
exception.
The district court rejected this argument, holding that “[t]he Texas
Wrongful Death Act, as applied in the present case, does not meet the exception
of Section 104(c), because a plaintiff can maintain an action that is not a
punitive damage action.” The court observed, “[t]he available compensatory
5
The Settlement Agreement requires the Taxpayers to keep the terms of the settlement
confidential. Accordingly, all documents identifying the amount and terms of the settlement
were filed under seal.
6
As amended in 1996, 26 U.S.C. § 104(a)(2) provides that:
(a) In general. -- . . . gross income does not include --
(2) the amount of any damages (other than punitive 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.
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No. 06-40526
remedies are either workers’ compensation payments or, if workers’
compensation is declined by a decedent, a common law action.”
The district court also distinguished the Taxpayers’ suit from Burford v.
United States,7 in which the plaintiffs were allowed to exclude their punitive
damages award from gross income.8 Burford involved punitive damages
awarded under Alabama’s wrongful death action, which allows for only punitive
damages. In Burford, the wrongful death recovery was the only recovery that
plaintiffs received; in contrast, the Taxpayers received workers compensation.9
The Taxpayers timely filed a notice of appeal.
II. APPLICABLE LAW AND ANALYSIS
A. Standard of Review
The Taxpayers’ appeal from the district court’s grant of summary
judgment involves only a question of law, which we review de novo.10
B. Taxation of Damages
As a general rule, gross income includes “all income from whatever source
derived.”11 “The Supreme Court has repeatedly emphasized the sweeping scope
of this definition, holding that Congress intended section 61(a), as well as its
7
642 F. Supp. 635 (N.D. Ala. 1986).
8
Burford addressed whether punitive damages could be excluded from gross income
under the pre-1996 version of § 104(a)(2). Id. at 636-38.
9
It is worth noting that Taxpayers may exclude the workers’ compensation payments
from gross income under § 104(a)(1).
10
Chamberlain v. United States, 401 F.3d 335, 337 n.8 (5th Cir. 2005).
11
I.R.C. § 61(a).
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No. 06-40526
statutory predecessors, to exert the ‘full measure of its taxing power.’”12
Therefore, “exclusions from gross income must be construed narrowly.”13
In 1996, Congress amended § 104 in an attempt to clarify the types of
damages that are included in gross income. Under the amended 26 U.S.C. §
104(a)(2), individuals who have received both compensatory and punitive
damages may exclude from gross income the compensatory damages received on
account of personal physical injury or physical sickness. Thus, only part of their
total award is taxed. Congress recognized, however, that some jurisdictions,
notably Alabama,14 allow wrongful death claimants to recover only punitive
damages. Under such circumstances, successful plaintiffs would have their
entire recovery taxed, even though the punitive damages award would likely
have some compensatory purpose in punitive-only jurisdictions. To avoid this
inequity, Congress enacted § 104(c), which provides
12
Chamberlain, 401 F.3d at 337 (quoting Helvering v. Clifford, 309 U.S. 331, 334
(1940)).
13
Id.
14
The government asserts that § 104(c) was intended to apply only to Alabama’s
wrongful death statute, which limits recovery in wrongful death actions to punitive damages.
The government uses legislative history in an attempt to prove that Congress intended § 104(c)
to apply only to Alabama’s wrongful death statute. We need not consider this argument,
however, as we do not find the statutory text to be ambiguous. See Exxon Mobil Corp. v.
Allapattah Servs., Inc., 545 U.S. 546, 568 (2005) (“As we have repeatedly held, the
authoritative statement is the statutory text, not the legislative history or any other extrinsic
material. Extrinsic materials have a role in statutory interpretation only to the extent they
shed a reliable light on the enacting Legislature’s understanding of otherwise ambiguous
terms.”); see also, Garrett v. Circuit City Stores, Inc., 449 F.3d 672, 679 (5th Cir. 2006)
(similar). Even if we were to consider the statute’s legislative history, we would see that the
text was not intended to apply only to Alabama’s wrongful death statute. In discussing
“present law” – which appears to mean the law as it existed before the 1996 amendments – the
House and Senate Committee Reports noted, “Certain States provide that, in the case of claims
brought under a wrongful death statute, only punitive damages may be awarded.” H.R. Rep.
No. 104-737, at 300 (1996) (Conf. Rep.) (emphasis added); S. Rep. No. 104-281, at 115 (1996)
(Conf. Rep.) (emphasis added). This use of the plural, “certain states,” confirms that § 104(c)
could apply to states other than Alabama. Thus, if we were to consider the legislative history
of § 104(c), the government’s argument would fail.
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No. 06-40526
Application of prior law in certain cases.-- The phrase “(other than
punitive damages)” [in § 104(a)] shall not apply to punitive damages
awarded in a civil action--
(1) which is a wrongful death action, and
(2) with respect to which applicable State law (as in effect on
September 13, 1995 and without regard to any modification after
such date) provides, or has been construed to provide by a court of
competent jurisdiction pursuant to a decision issued on or before
September 13, 1995, that only punitive damages may be awarded in
such an action.
In contending that the district court erred in concluding that their punitive
damages award does not fall under § 104(c), the Taxpayers argue that it does
because they received punitive damages from (1) a civil action, (2) which was a
wrongful death action, (3) in which they could only receive punitive damages
under applicable state law. The Taxpayers recognize that, ordinarily, plaintiffs
may receive both compensatory and punitive damages in a Texas wrongful death
action. They note, however, that, under Texas law, only punitive damages are
available for a wrongful death action if the decedent was covered by workers’
compensation,15 which, they maintain, brings the punitive damages in this case
within § 104(c)’s scope.
The government responds that we should reject the Taxpayers’
interpretation of § 104(c) because, in this case, the “applicable State law” (which,
it contends, is Texas’s wrongful death statute) allows plaintiffs to recover both
compensatory and punitive damages. Conversely, the Taxpayers insist that
“applicable State law” modifies “a civil action” (§ 104(c)) rather than “wrongful
death action” (§ 104(c)(1)). Thus, they assert, the second clause of 104(c)
effectively reads “(2) with respect to which [civil action] applicable state law . .
. provides . . . that only punitive damages may be awarded in such an action.”
15
TEX. LAB. CODE §§ 408.001(a, b).
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No. 06-40526
Simply put, the government contends that “applicable law” refers to the state
wrongful death law generally, and the Taxpayers contend that “applicable law”
refers to the law governing the particular lawsuit.
Interpreting § 104(c) narrowly, as we must,16 we agree with the
government that “applicable law” refers to the state’s wrongful death law. The
Taxpayers’ reading of the statute would have us ignore § 104(c)(1). When we
include § 104(c)(1) in the analysis, the statute exempts from taxation “punitive
damages awarded in a civil action . . . that is a wrongful death action . . . with
respect to which applicable State law . . . provides . . . that only punitive
damages may be awarded in such an action.” Although the statute is not a
model in clarity, we conclude that its reference to the “applicable State law” is
to the law governing wrongful death actions. And, the Texas state law
applicable to wrongful death actions does not restrict the recovery of successful
plaintiffs only to punitive damages.17 Rather, it is Texas’s Workers’
Compensation Act that limits recovery to punitive damages and then only to
those plaintiffs who recover workers’ compensation benefits for the wrongful
death of a covered worker.18 In contrast, Alabama’s wrongful death law at issue
in Burford restricts recovery in all wrongful death actions to punitive damages.19
Mindful that “exclusions from gross income must be construed narrowly,”20 we
hold that § 104(c) does not apply when the state law governing wrongful death
16
Chamberlain, 401 F.3d at 337.
17
TEX. CIV. PRAC. & REM. CODE ANN. §§ 71.002(a), 71.009 (Vernon 1997).
18
TEX. LAB. CODE §§ 408.001(a, b) (Vernon 2005).
19
Burford v. United States, 642 F. Supp 635, 636-38 (N.D.Ala. 1986); Omni Ins. Co. v.
Foreman, 802 So.2d 195, 199 (Ala. 2001) (“It is hornbook law that in Alabama, the only
damages a plaintiff is allowed to recover in an action for wrongful death are punitive
damages.”).
20
Chamberlain, 401 F.3d at 337.
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No. 06-40526
actions provides that a plaintiff may recover both punitive damages and
compensatory damages, even if some other law of the state, such as the Workers’
Compensation Act here, limits some wrongful death plaintiffs from recovering
punitive damages.
According to the Taxpayers, allowing them to exclude their punitive
damages award from gross income would be consistent with Congress’s intent
in adding § 104(c). The Taxpayers explain that they would have received
compensatory damages far in excess of the workers’ compensation insurance
benefits if they had been able to bring a common law action for compensatory
damages. They maintain that, because they still have substantial
uncompensated actual losses, their punitive damages award falls under § 104(c)
because it is in part compensatory. We disagree.
Congress passed § 104(c) to remedy the seemingly inequitable situation in
which some taxpayers would have their entire recoveries taxed. In this case,
however, the Taxpayers’ entire recovery was not taxed. The Taxpayers received
both workers’ compensation benefits and punitive damages as a result of the
death of Roger Benavides. Under § 104(a)(1), the workers’ compensation
benefits that they received were excluded from gross income. It is irrelevant for
purposes of § 104 that the Taxpayers might have received a greater recovery if
they had been able to pursue a common law action for compensatory damages.21
Finally, the Taxpayers argue in the alternative that Paul and David
should be allowed to exclude their portion of the punitive damages award from
gross income. They note that only Linda, as the surviving spouse, received any
workers’ compensation benefits, so Paul and David – who received only punitive
damages – should be entitled to exclude their portions of the punitive damages
21
Presumably, Roger Benavides elected the more limited recovery of workers’
compensation benefits in exchange for the more certain and expeditious recovery provided by
the workers’ compensation system. Cf. Tex. Workers Comp. Comm’n v. Garcia, 893 S.W.2d
504, 521 (Tex. 1995).
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No. 06-40526
from their gross income. We see two problems with this assertion, either of
which is sufficient to stymie that argument. First, the stipulated facts state that
Linda Benavides “and her children filed for and received Workers’ Compensation
death benefits.” Second, we read § 104(c) as being concerned with whether the
applicable state law limits damages to only punitive damages, not with whether
the particular plaintiffs actually recovered compensatory damages.
III. CONCLUSION
We hold that 26 U.S.C. § 104(c) does not exclude punitive damages from
the gross income of the survivors of a deceased worker when the wrongful death
laws of the state in question do not limit recovery to punitive damages, even if,
as here, some other law of the state, such as its Workers’ Compensation Act,
might restrict wrongful death recovery to punitive damages. We therefore affirm
the judgment of the district court.
AFFIRMED.
9