FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JACK A. RIVERA, 

Plaintiff-Appellant,

v. No. 03-17261

BAKER WEST, INC., an Arizona D.C. No.

corporation; BAKER CONCRETE  CV-02-02082-EHC

CONSTRUCTION, INC., an Arizona OPINION corporation, dba Baker Concrete,

Inc.,

Defendants-Appellees. 

Appeal from the United States District Court

for the District of Arizona

Earl H. Carroll, District Judge, Presiding

Submitted June 17, 2005*

San Francisco, California

Filed December 13, 2005

Before: Richard C. Tallman, Jay S. Bybee, and

Carlos T. Bea, Circuit Judges.

Opinion by Judge Bybee

*The panel finds this case appropriate for submission without oral argument pursuant to FED. R. APP. P. 34(a)(2). 

16285
COUNSEL

William D. Howell III, The Howell Law Firm, LLC, Phoenix,

Arizona, for the plaintiff-appellant. 

Rebecca Winterscheidt, and Leslie A. Smith, Snell & Wilmer,

LLP, Phoenix, Arizona, for the defendants-appellees. 

16288 RIVERA v. BAKER WEST, INC.
OPINION

BYBEE, Circuit Judge: 

Jack Rivera (“Rivera”) appeals the district court’s order

dismissing his suit against Baker Concrete Construction, Inc.

(“Baker”). Rivera argues that Baker improperly withheld

approximately fifteen thousand dollars in state and federal

employment taxes from a check that was paid to settle his

claim for unlawful workplace discrimination and wrongful

termination and, therefore, that the district court erred in dismissing the suit on the basis of the settlement. Rivera’s argument is twofold: first, he argues that the settlement proceeds

paid by Baker were intended to reimburse Rivera for personal

physical injuries and should therefore be excluded from his

gross income under 26 U.S.C. § 104(a)(2); second, he argues

that, even assuming the settlement proceeds represent lost

wages, an award of back pay under Title VII is not subject to

income tax withholding. 

We conclude that the district court did not clearly err in

finding that the settlement proceeds were not intended to

compensate for personal physical injuries, but instead represented lost wages. Because the district court reasonably classified the settlement proceeds as back pay, the district court

properly held that Rivera’s settlement proceeds were subject

to withholding. Accordingly, we affirm the district court’s

decision granting Baker’s motion to dismiss. 

I. FACTS AND PROCEEDINGS

In October 2002, Rivera filed a complaint against Baker

alleging: (1) that he was subjected to a hostile work environment as a result of discrimination based on his race and

national origin; (2) that he was wrongfully terminated by

Baker; and (3) that his employer subsequently provided unfavorable references, all in violation of 42 U.S.C. §§ 1981,

1983, 1985, 2000e-2, 2000e-3, and 2000e-16. The parties

RIVERA v. BAKER WEST, INC. 16289
appeared before a magistrate judge for a settlement conference and reached a settlement agreement. The executed settlement agreement provided in Section I that Baker would pay

Rivera the “sum of forty thousand ($40,000) less all lawfully

required withholdings.” 

Baker issued Rivera a check in the amount of $25,140,

retaining $14,860 as a “lawfully required withholding.” The

amount withheld included $10,000 in federal income tax,

$3,060 in Federal Insurance Contributions Act (“FICA”) tax,

and $1,800 in state income tax. Baker then filed a motion for

dismissal with prejudice because Rivera cashed the $25,140

settlement check but had not dismissed his claims. Rivera

opposed the motion, arguing that the settlement terms were

not defined in the agreement, and that taxes should not have

been withheld. Rivera requested that the district court enforce

the settlement agreement and order Baker to pay the withheld

settlement amount to Rivera. 

The district court granted Baker’s motion to dismiss. The

court found that “the settlement agreement signed by both

parties [did] not state whether the settlement sum constituted

payment for lost wages or back pay.” It also found that Rivera’s complaint did not allege damages for “emotional distress

or any other exception that would warrant classifying the settlement sum as anything other than an award for back pay.”

The court concluded that the settlement sum was lawfully

classified as taxable wages and that Baker’s withholding was

proper. This appeal followed. 

II. STANDARD OF REVIEW

We review questions of law de novo, Milenbach v. Commissioner, 318 F.3d 924, 930 (9th Cir. 2003), and review

findings of fact for clear error, Nunes v. Mueller, 350 F.3d

1045, 1051 (9th Cir. 2003). 

16290 RIVERA v. BAKER WEST, INC.
III. DISCUSSION

Rivera makes two principal arguments: (1) that the district

court improperly found that the parties’ settlement represented back pay because it encompassed emotional distress

and mental anguish allegedly suffered as a result of Baker’s

conduct, and (2) that the district court erred because lost

wages recovered under Title VII are not subject to income tax

withholding. We discuss each in turn. 

A. Classifying Settlement Proceeds As Income

[1] The Internal Revenue Code defines gross income as “all

income from whatever source derived,” except as excluded by

other provisions of the Code. 26 U.S.C. § 61(a) (2004). Section 104(a)(2) provides an exclusion for “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.” 26 U.S.C. § 104(a)(2) (emphasis added); see also

26 C.F.R. § 1.104-1(c). The italicized language of the

§ 104(a)(2) exclusion was added by the Small Business Job

Protection Act of 1996, Pub. L. 104-188, § 1605, to make

clear that only damages for physical injuries or sickness, and

not damages for emotional distress, were excluded from the

definition of income. See Mayberry v. United States, 151 F.3d

855, 858 n.2 (8th Cir. 1998). Prior to this amendment, the

Supreme Court held in Commissioner v. Schleier, that a taxpayer seeking to exclude money damages from income bears

the burden of proving that the exclusion applies. 515 U.S.

323, 336-37 (1995) (involving damages received pursuant to

a settlement agreement disposing of the plaintiff’s age discrimination claims). 

[2] The 1996 amendment does not affect the allocation of

the burden of proof discussed in Schleier. Thus, in order for

Rivera’s settlement proceeds to qualify for a § 104(a)(2)

exclusion, he must show that: (1) “the underlying cause of

RIVERA v. BAKER WEST, INC. 16291
action giving rise to the recovery is ‘based upon tort or tort

type rights;’ ” and (2) “the damages were received ‘on

account of personal [physical] injuries or [physical] sickness.’ ” Schleier, 515 U.S. at 337 (alteration added) (quoting

United States v. Burke, 504 U.S. 229, 234 (1992)). We conclude that Rivera has failed to satisfy the second requirement,

that the damages were received on account of personal physical injuries or physical sickness, and therefore do not address

whether the post-1991 version of Title VII contemplates the

types of damages associated with tort and tort-like claims.1

[3] The second requirement of the Schleier test “can only

be satisfied if there is ‘a direct causal link’ between the damages and the personal injuries sustained.” Banaitis v. Comm’r,

340 F.3d 1074, 1080 (9th Cir. 2003) (quoting Fabry v.

Comm’r, 223 F.3d 1261, 1270 (11th Cir. 2000)), abrogated

on other grounds by Comm’r v. Banks, 543 U.S. 426 (2005).

Thus, when damages are paid through a settlement agreement,

we will look first to the underlying agreement to determine

whether it expressly states that the damages compensate for

“personal physical injuries or physical sickness” under

§ 104(a)(2). See Pipitone v. United States, 180 F.3d 859, 863

(7th Cir. 1999). If the agreement lacks express language specifying the purpose of the compensation, we will then examine

the intent of the payor. See id. at 864; Kurowski v. Comm’r,

917 F.2d 1033, 1036 (7th Cir. 1990); Knuckles v. Comm’r,

349 F.2d 610, 613 (10th Cir. 1965). The payor’s intent can be

“based on all the facts and circumstances of the case, including the complaint that was filed and the details surrounding

the litigation.” Allum v. Comm’r, 90 T.C.M. (CCH) 74 (2005).

[4] First, examining the agreement, we conclude that it

1Congress amended Title VII in the Civil Rights Act of 1991, Pub. L.

102-166, § 1745, to provide non-economic based remedies. In United

States v. Burke, 504 U.S. 229, 241 (1992), the Supreme Court held that the

pre-1991 version of Title VII did not contemplate the types of damages

associated with tort and tort-like claims. 

16292 RIVERA v. BAKER WEST, INC.
does not expressly state that the damages paid to Rivera compensate for personal physical injuries or physical illness.

Rivera has not pointed to a provision of the agreement that

supports a contrary conclusion. The settlement agreement lists

only the amount of the settlement and does not describe the

specific personal injuries Rivera may have sustained. To the

extent the agreement betrays the nature of the settlement, the

inferences run against Rivera or, at best, are neutral. The settlement agreement provides that Baker would pay Rivera

$40,000 “less all lawfully required holdings.” If, as Rivera

claims, the $40,000 compensated him for personal physical

injuries or physical sickness, the phrase “less all lawfully

required holdings” is not only surplusage, but quite misleading. The phrase, however, is entirely consistent with Baker’s

insistence that the settlement compensated Rivera for back

pay. Nevertheless, the settlement agreement falls short of

expressly identifying the nature of the injuries redressed. 

[5] Second, if there is no express evidence of the parties’

intent in the settlement agreement, we look to the intent of the

payor. Baker argues that it did not intend the award to compensate for personal physical injuries or physical sickness, but

rather to dispose of Rivera’s back pay claim. Once again,

Baker points to language in the settlement agreement stating

that Baker would pay Rivera $40,000 “less all lawfully

required withholdings.” This language is the best (and only)

available evidence of the payor’s intent, save Rivera’s bare

assertion to the contrary, and it suggests that Baker intended

some or all of the damages to constitute back pay. For reasons

stated above, the inference is a reasonable one: “[t]he withholding of taxes is a significant factor suggesting the

employer intended a payment to constitute severance pay.”

Pipitone, 180 F.3d at 864 (citing Nagourney v. Comm’r, 57

T.C.M. (CCH) 954, 957 (1989), aff’d without published opinion, 904 F.2d 700 (4th Cir. 1990)). While this provision is not

conclusive proof of Baker’s intent, the agreement’s failure to

specify an amount attributable to personal injuries creates a

presumption that Baker intended that the amount constitute

RIVERA v. BAKER WEST, INC. 16293
back pay, and, therefore, the entire amount is not excludible.

Id. at 864-65 (quoting Wise v. Comm’r, 75 T.C.M. (CCH)

1514, 1517 (1998)). Rivera has failed to present evidence to

rebut this presumption.2

[6] We hold that the district court properly found that the

settlement agreement encompassed only damages for lost

wages. We therefore conclude that the district court did not

clearly err by classifying the settlement proceeds as lost

wages not entitled to a § 104(a)(2) exclusion.

B. Withholding Taxes from Settlement Proceeds 

Rivera argues that, even if his settlement award was income

to him, awards for back pay under Title VII are not subject

to income tax withholding. We disagree, and hold that the settlement proceeds paid to compensate Rivera for his lost wages

are subject to income tax withholding. 

2Rivera argues that his discrimination claim was a “personal injury

claim” and that Baker knew or should have known of the nature of his

claim, but the record offers no support whatsoever for his argument. First,

the complaint does not allege that he suffered any physical injury or physical sickness. Second, Rivera did not reveal in his Rule 26 disclosure statement any personal physical injury or physical sickness as a “category of

damages” for which he sought relief. See FED. R. CIV. P. 26(a)(1)(C) (“a

party must, without awaiting a discovery request, provide to other parties

. . . a computation of any category of damages claimed by the disclosing

party [and the documents] on which such computation is based”). Finally,

Rivera has failed to produce any evidence regarding the settlement conference during which the parties allegedly discussed Rivera’s emotional distress and mental anguish. Rivera has offered nothing that challenges, much

less refutes, the presumption created by the language of the settlement

agreement. See Lindsey v. Comm’r, 422 F.3d 684, 689 (8th Cir. 2005)

(“Lindsey fails to establish the second criterion, because he has not identified what percentage of the settlement damages is allocable to physical

injury or physical sickness, and the record lacks any evidentiary basis for

concluding a specific portion of the . . . settlement payment is allocable

to Lindsey’s physical injury or physical sickness.”). 

16294 RIVERA v. BAKER WEST, INC.
[7] The Internal Revenue Code defines “wages” as “all

remuneration for employment, including the cash value of all

remuneration (including benefits) paid in any medium other

than cash.” 26 U.S.C. § 3121(a) (1998). It specifically

excludes from that definition any payments made by the

employer on account of sickness or accident disability, medical or hospitalization expenses, or death. Id. at

§ 3121(a)(2)(A)-(C). The Fourth Circuit has observed that the

“language in the Internal Revenue Code and the Treasury

Regulations . . . is expansive,” and has held that certain settlement payments “fit easily within FICA’s broad definition of

‘wages’ as ‘all remuneration for employment unless specifically excepted.’ ” Hemelt v. United States, 122 F.3d 204, 209

(4th Cir. 1997) (citing 26 U.S.C. § 3121(a) and 26 C.F.R.

§ 31.3121(a)-1(b)). 

[8] The Internal Revenue Code defines “employment” to

include “any service, of whatever nature, performed . . . by an

employee for the person employing him.” 26 U.S.C.

§ 3121(b). The Supreme Court and Fourth Circuit have

emphasized the broad, inclusive nature of “employment.” See

Soc. Sec. Bd. v. Nierotko, 327 U.S. 358, 365 (1946); Hemelt,

122 F.3d at 209. “ ‘[S]ervice’ as used by Congress in this

definitive phrase means not only work actually done but the

entire employer-employee relationship for which compensation is paid to the employee by the employer.” Nierotko, 327

U.S. at 365-66. The Code does not distinguish between back

pay based on, for example, contract claims, and back pay

based on Title VII claims. 

At least three circuits have held that settlement payments

based on Employee Retirement Income Security Act

(“ERISA”) claims are “wages” and require payments to be

withheld for tax purposes. See, e.g., Gerbec v. United States,

164 F.3d 1015, 1025-27 (6th Cir. 1999) (holding that a portion of the ERISA settlement “may be subject to federal

income taxation as well as FICA taxation” and that “any damages attributable to wages [the taxpayers] would have

RIVERA v. BAKER WEST, INC. 16295
received had they not been wrongfully terminated should also

be subject to the FICA taxes they would have paid on those

wages had they not been wrongfully terminated”); Mayberry,

151 F.3d at 860 (holding that an ERISA settlement was not

excludible from gross income and was “wages” subject to

FICA taxes); Hemelt, 122 F.3d at 209-10 (holding that settlement payments for ERISA claims approximate recovery for

lost wages and are properly defined as wages for FICA withholding purposes). Moreover, one court analogized ERISA

claims to “claims under Title VII and the ADEA,” because

they are all “designed to approximate[ ] recovery for lost

wages and other economic harms.” Hemelt, 122 F.3d at 209.

[9] Like the ERISA claims at issue in Gerbec, Mayberry,

and Hemelt, Rivera’s claims stem from his employeremployee relationship with Baker. The settlement payments

are compensation for back pay and lost wages; the fact that

Rivera alleged that back pay was owed him because of violations of federal discrimination laws is incidental to whether

his back pay constitutes wages subject to withholding. We

conclude that Rivera’s back pay and lost wages constitute

“wages” for taxable withholding purposes, and the district

court properly held that these settlement payments were subject to withholding. See 26 U.S.C. § 3121(a); 26 C.F.R.

§ 31.3121(a)-(1)(i). 

[10] Even though Rivera is not currently employed by

Baker, his “wages” from the settlement agreement are still

subject to taxable withholding. “[R]emuneration for employment . . . constitutes wages even though at the time [the wages

are] paid the relationship of employer and employee no longer

exists between the person in whose employ the services were

performed and the individual who performed them.” 26

C.F.R. § 31.3121(a)-(1)(i); see also Gerbec, 164 F.3d at 1026

(“We conclude that it would be improper to exempt Plaintiffs

from mandatory FICA taxes merely because they were not

employees of [their company] at the time the payments were

made and because the payments were not in return for actual

16296 RIVERA v. BAKER WEST, INC.
services performed.”). Baker properly withheld the tax from

Rivera’s settlement payments, even though he was not currently in Baker’s employ at the time the settlement was paid.

In fact, Baker might have been liable for failing to withhold

the necessary taxes. See, e.g., 26 U.S.C. § 3402(a)(1)

(“[E]very employer making payment of wages shall deduct

and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by

the Secretary.”); § 3403 (“The employer shall be liable for the

payment of the tax required to be deducted and withheld

under this chapter . . . .”); see also Bright v. Bechtel Petroleum, Inc., 780 F.2d 766 (9th Cir. 1986) (holding that the duty

to withhold is mandatory, rather than discriminatory, in

nature). 

[11] Rivera is not without recourse, either as to the fact or

the amount of income tax withheld.3 He remains free to seek

a refund for wrongfully withheld taxes via a direct claim to

the Internal Revenue Service. Nonetheless, we hold that

because the settlement proceeds were properly classified as

lost wages, the district court correctly deemed the proceeds

subject to income tax withholding.

IV. CONCLUSION

For the foregoing reasons, we affirm the judgment of the

district court. 

AFFIRMED. 

3Rivera also argues that the amount of tax withheld by Baker was

improper. Rivera waived this claim by failing to raise it before the district

court. 

RIVERA v. BAKER WEST, INC. 16297