Court Opinion

ID: 4472198
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:19:40.895966+00
Date Added: 2024-06-11T14:53:49.137937
License: Public Domain

Halpern, J., dissenting. I dissent because I believe that the majority has not properly taken account of Congress’ 1982 amendment to section 104(a)(2). See section 101 of the Periodic Payment Settlement Act of 1982 (the 1982 amendment), Pub. L. 97-473, 96 Stat. 2605, which struck from section 104(a)(2) the language “whether by suit or agreement” and inserted in lieu thereof the language “whether by suit or agreement and whether as lump sums or as periodic payments”. The majority would treat the 1982 amendment as a narrow-purpose amendment, confirming only the application of the section 104(a)(2) exclusion to periodic payments of damages. Majority op. pp. 132-133. I agree with the majority that the 1982 amendment confirms the application of the section 104(a)(2) exclusion to periodic payments of damages. I disagree with the majority, however, as to what Congress had in mind when it confirmed that application of section 104(a)(2). The legislative history of the 1982 amendment makes it crystal clear that the exclusion for periodic payments of damages on account of personal injuries is not limited to the present value of such periodic payments. Periodic payments — in their entirety — are excludable from gross income under section 104(a)(2) as damages received on account of personal injuries. No allocation is allowed for that portion of such payments that represents consideration for the use of money over time, i.e., interest. I would hold that lump-sum payments, including any interest component, likewise are fully excludable under section 104(a)(2) as damages received on account of personal injuries. Certainly, the phrase “whether as lump sums or as periodic payments”, which, in the statute, modifies the phrase “damages received”, suggests that Congress intended to disregard any difference between the two methods of payment. Based on the 1982 amendment, I would hold for petitioners on the exclusion issue.1  Interest Portion of Periodic Payments Excluded The legislative history of the 1982 amendment states that the amendment was intended to codify, rather than change, present law: The bill specifically provides that the Code section 104 exclusion from gross income of damages for personal injuries or sickness applies whether the damages are paid as lump sums or as periodic payments. This provision is intended to codify, rather than change, present law. Thus, the periodic payments of personal injury damages are still excludable from income only if the recipient taxpayer is not in constructive receipt of or does not have the current economic benefit of the sum required to produce the periodic payments. See Rev. Rul. 79-220, and Rev. Rul. 77-230. [S. Rept. 97-646 (1982), 1983-1 C.B. 514, 515; accord H. Rept. 97-832 (1982).] As a preliminary matter, it is clear that the Finance Committee intended no change in the law of constructive receipt or in the economic benefit doctrine. See, e.g., Rev. Rul. 65-29, 1965-1 C.B. 59 (income realized from the investment of a lump-sum award representing the discounted present value of a damage award for personal injuries is not excludable from gross income under section 104(a)(2)). Therefore, two possibilities present themselves as to what the Finance Committee had in mind in confirming the application of the section 104(a)(2) exclusion to periodic payments. The committee may have intended that periodic payments of damages on account of personal injuries are to be received tax-free only until an amount equal to the present value of such periodic payments has been recovered, with the section 104(a)(2) exclusion thereafter being inapplicable, because exhausted. Alternatively, the committee may have intended that such periodic payments, in their entirety, are to be excluded from gross income. The committee’s report is persuasive evidence of the latter. See S. Rept. 97-646, supra, citing four revenue rulings (described supra majority op. note 14) as illustrative of present law. Accord H. Rept. 97-832 (1982). The first three rulings amply illustrate that the Finance Committee intended the entirety of periodic payments received in discharge of an obligation to pay damages on account of personal injury to be received tax free. See, e.g., Rev. Rul. 79-220, 1979-2 C.B. 74 (present value at settlement date of monthly payments to be received less than nominal total of such payments; nominal total excluded from income under section 104(a)(2)). Indeed, the majority does not appear to disagree with that point. Lump-Sum Payments Once it is understood that the 1982 amendment stands for the proposition that, with regard to periodic payments, the time value of money is to be disregarded, then the only remaining question is whether Congress intended any different result with regard to lump-sum payments. I believe that it did not and, consequently, whether payments are made periodically or in a lump sum, time value of money considerations are to be disregarded in determining the tax-ability of amounts received under section 104(a)(2). As stated earlier, the language of the 1982 amendment supports that conclusion: “whether as lump sums or as periodic payments” suggests that Congress intended to disregard any difference between the two methods of payment. The revenue rulings cited in the legislative history of the 1982 amendment are of little help in resolving the question, their analysis being mostly conclusory and illustrating well only how to avoid receipt (for tax purposes) of the present value of the expected future payments. Certainly, the rule of exclusion for periodic payments is not limited to the three situations cited as illustrative of present law. Indeed, it appears indisputable that those examples are merely illustrative of some broader rationale on the part of Congress. The breadth of that rationale, however, is unclear. I perceive no persuasive evidence to explain Congress’ distinguishing between lump-sum and periodic payments, as the majority suggests. Congress, one might hypothesize, may have been concerned that a taxpayer accepting a periodic payment arrangement had accepted the credit risk that even the present value of the expected periodic payments would not be received. Rev. Ruis. 79-220, supra, and 79-313, 1979-2 C.B. 75, are consistent with that conclusion. It is difficult, however, to see that concern as prompting the wholesale exclusion of periodic payments, which, as discussed earlier, the 1982 amendment clearly requires. Certainly, if that were Congress’ concern, it would have been sufficient to exclude damages received only up until the principal portion of such damages is received. In trying to determine Congress’ concern in adopting the 1982 amendment, I find myself in a puzzlement that I can only resolve by deciding that, for whatever reasons, Congress decided that it was best to disregard the fact that time value of money concerns play a role in determining the size of personal injury damage awards or settlement amounts, and to treat no part of any payment of damages received in connection with personal injuries as being on account of the time value of money. Thus, I would not distinguish between lump-sum payments and periodic payments with regard to time value of money considerations. I have no quarrel with the majority’s distinction between a principal sum and interest. Majority op. p. 129. That distinction, however, appears to be irrelevant when dealing with damages received, whether by suit or agreement and whether as a lump sum or periodic payment, on account of personal injuries. For purposes of section 104(a)(2), interest constituting a portion of such an award or settlement amount and attributable to the payment of damages for personal injury is to be treated no differently from what the majority would agree are damages on account of personal injuries. Treating periodic payments and lump-sum amounts differently with regard to interest does not, as the majority would have it, illustrate only a “potential theoretical inconsistency” wrought by Congress in enacting the 1982 amendment; it illustrates a patent inconsistency in the majority’s interpretation of that amendment, whereby Congress decided, for whatever reasons, in connection with section 104(a)(2) payments, to turn a blind eye to interest. We are obliged to respect that decision. Judge Beghe’s Dissent Judge Beghe also dissents from the opinion of the majority. Of course, I agree with Judge Beghe to the extent that he would exclude the entirety of petitioners’ recovery based on the 1982 amendment. Beghe op. pp. 151-153. I also agree with his rejection of application of the so-called reenactment doctrine to this case. Id. p. 154. I disagree, however, with his conclusion that the sole condition for exclusion of a receipt under section 104(a)(2) is that the amount received (here prejudgment interest) constitutes “damages” within the meaning of that section. Judge Beghe reaches that conclusion based, in part, upon the following reading of United States v. Burke, 504 U.S. _, 112 S. Ct. 1867 (1992): “Once it is found that the personal injury claim is tort or tortlike, all amounts received * * * through the prosecution of the claim are excluded from gross income.” Beghe op. p. 146. Unlike Judge Beghe, I do not read Burke as standing for the proposition that all amounts received through the prosecution of a claim for a tort (or tortlike) personal injury are excludable under section 104(a)(2). In Burke, the Supreme Court merely considered whether the type of injury redressed by title VII of the Civil Rights Act of 1964 (title VII), Pub. L. 88-352, 78 Stat. 253 (current version at 42 U.S.C. sections 2000e to 2000e-17 (1988)), is a “personal injury” within the meaning of section 104(a)(2). The Supreme Court did not have before it, nor did it consider, the meaning of the term “damages” as used therein.2 The Court’s holding was as follows: Notwithstanding a common-law tradition of broad tort damages and the existence of other federal antidiscrimination statutes offering similarly broad remedies, Congress declined to recompense Title VII plaintiffs for anything beyond the wages properly due them — wages that, if paid in the ordinary course, would have been fully taxable. Thus, we cannot say that a statute such as Title VII, whose sole remedial focus is the award of backwages, redresses a tort-like personal injury within the meaning of section 104(a)(2) and the applicable regulations. Accordingly, we hold that the backpay awards received by respondents in settlement of their Title VII claims are not excludable from gross income as “damages received ... on account of personal injuries” under section 104(a)(2). * * * [Id. at_, 112 S. Ct. at 1874; emphasis added; fn. ref. and citations omitted.] I therefore would hold that Burke sheds no light on the question of whether the interest at issue constitutes damages received on account of personal injuries within the meaning of section 104(a)(2). Nevertheless, I am prepared to agree with Judge Beghe that the interest at issue constitutes “damages” within the meaning of section 104(a)(2). Section 1.104-1(c), Income Tax Regs., is expansive in defining the term “damages” for purposes of section 104(a)(2): “The term ‘damages received (whether by suit or agreement)’ means an amount 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.” However, unlike Judge Beghe (and perhaps many of my colleagues), I do not think the sole condition for exclusion contained in section 104(a)(2) is that an amount constitute damages received in a suit involving such tortlike personal injury. Another necessary condition contained in section 104(a)(2) is that the damages be received “on account of personal injuries or sickness”. See Horton v. Commissioner, 100 T.C. 93, 108 (1993) (Whalen, J., dissenting) (emphasis added). Absent the 1982 amendment, I would not be persuaded that that condition has been met. Indeed, the purposes of the Michigan statutory interest provision in question, Mich. Comp. Laws sec. 600.6013 (1987), have been stated by the Michigan Supreme Court to be compensating for delay in payment of money damages, covering the costs of litigation, and encouraging prompt settlement. Old Orchard by the Bay v. Hamilton Mut. Ins. Co., 454 N.W.2d 73, 76-77 (Mich. 1990). From that description alone, I would not conclude that the interest in question was received “on account of personal injuries or sickness.” For that reason, without benefit of the 1982 amendment, I would not conclude that the requirements of section 104(a)(2) have been satisfied. Whalen, J., agrees with this dissenting opinion.   Judge Beghe, in his dissent, informs us that petitioners have conceded the taxability of certain “postjudgment” interest. I would limit my holding for petitioners to “prejudgement” interest, saving the question of “postjudgment” interest for another day.    The Court relied in part on sec. 1.104-1(c), Income Tax Regs., which defines “damages received”. Justice Scalia, questioning the relevance of that regulation, noted: “this regulation purports expressly to define only the term ‘damages received,’ and not the * * * term we are called upon to interpret today (‘personal injuries’)”. United States v. Burke, 504 U.S. _, _, 112 S. Ct. 1867, 1875 (1992) (Scalia, J., concurring) (citations omitted).