Court Opinion

ID: 6980311
Source: CourtListenerOpinion
Date Created: 2022-07-24 02:18:28.50701+00
Date Added: 2024-06-11T16:09:09.964115
License: Public Domain

WELLFORD, Circuit Judge,
dissenting.
I dissent from the decision in this case, one of many arising from a consolidated class action suit brought by former employees of Continental Can Company challenging the taxability of payments made to such employees, including plaintiffs Gerbec and Morgan. The district court held that payments to these plaintiffs were taxable for federal income tax purposes, but not taxable under FICA.
The majority, somewhat begrudgingly, concedes that the Supreme Court in Mertens v. Hewitt Associates, 508 U.S. 248, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993), construed § 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), as “only permitting the categories of relief that were typically available in equity.” Id. at 256-58. Mertens held that the term, “any other equitable relief,” excludes from income tax consequences “awards for compensatory or punitive damages.” Id. at 255, 113 S.Ct. 2063. The majority adopts the reasoning of Dotson v. United States, 87 F.3d 682 (5th Cir.1996), interpreting Mertens in the context of the issues of this case. Dotson was a split opinion, and the dissenter, I believe, made the proper interpretation. The Fourth Circuit in Hemelt v. United States, 122 F.3d 204 (4th Cir.1997), like the district court and the dissent in Dotson, reached a contrary result, finding that the proceeds of the Continental Can settlement were taxable for income tax purposes and for FICA tax purposes as well.
The reasoning of Hemelt was also adopted in Mayberry v. United States, 151 F.3d 855 (8th Cir.1998). That line-up of circuit judges in these three cases (seven judges to two judges) hardly seems to indicate a “sharply divided” judicial assessment of the issues and the import of Mertens upon these issues. Three of the four district courts involved have adopted the rationale of Hemelt and Mayberry.
Like the majority of the circuit courts and judges who have considered this very controversy, I disagree with my colleagues and conclude that Mertens is applicable here and that this is indeed an ERISA-related case. The rule announced in Harper v. Virginia Dep’t of Taxation, 509 U.S. 86, 97, 113 S.Ct. 2510, 125 L.Ed.2d 74 (1993), is properly applicable with respect to Mertens.1 Our decision should be based upon what seems to be reasoned legal authority of two of our sister circuits, not by the fears about the undesirable effects of Mertens, a case binding on us. See Dotson, 87 F.3d at 691 (Smith, C.J., dissenting).
I find the majority of the panel to be off the mark in expressing concerns about “appropriate remedies, sanctions and access to federal courts” under ERISA, particularly when it states that this is not an ERISA case. That the benefits awarded plaintiffs under ERISA are substantial belies such concerns in this case as access to the courts and appropriate remedies. The issue is simply whether these benefits are taxable just as other compensation-like, non-personal injury-type benefits are taxable.
I agree with my colleagues only in respect to their concession that at least the back wages portion and the “future lost wages” portion of the awards are clearly taxable both with respect to income and FICA taxes. I dissent, however, from the statement that any “future lost wages attributable to causa*1028tion by personal injury” may be excludable from tax under § 104(a)(2) under the circumstances of this case.
A major basis for the majority opinion that this “is not an ERISA case” is that the parties made a good faith settlement agreement concerning whether benefits to employees, such as plaintiffs in this case, were “compensatory damages.” This rationale that a party agreement, even if reached in good faith, may be binding on the proper tax characterization of benefits or payments made by one party to the other does not pass muster. Tax disputes are frequently determined by the Internal Revenue Service or the court based upon the tax code and regulations instead of the way parties may have purported or intended to act. A party employee may claim that a payment to that employee is a gift instead of a taxable bonus or compensation. A party corporation may claim and intend that a distribution to a shareholder is á return of capital or a capital gain rather than a taxable dividend. An ex-spouse’s payment to his former wife may be deemed taxable alimony rather than child support. A “loan” from one party to another may be deemed by IRS to be a taxable payment, dividend, or compensation. All of these agreements may involve unintended tax consequences to the parties thereof. In this tax case arising out of an ERISA settlement, we must apply the law regardless of the characterization of the benefits designed by the parties in reaching a settlement.
Dotson, supra, reversed the decision of the district court, holding that “Mr. Dotson failed the requirement that damages be recovered for a tort-like claim.” 87 F.3d at 685. The district court in Dotson relied upon Mertens as to characterization of the ERISA benefits, as have the other circuits save the divided Fifth Circuit. See also Medina v. Anthem Life Ins. Co., 983 F.2d 29, 32 (5th Cir.), cert. denied 510 U.S. 816, 114 S.Ct. 66, 126 L.Ed.2d 35 (1993). The Dotson majority reached a decision that this controversy is not an ERISA case, but it realized the strong ERISA implications.2 Id. at 686. It also held that Mertens could not “change the classification ... for tax purposes” and distinguished (or attempted to distinguish) both Commissioner v. Schleier, 515 U.S. 323, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995), and United States v. Burke, 504 U.S. 229, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992). It should be noted that Schleier cited Burke at 248, 112 S.Ct. 1867 as recognizing the rule that “exclusions of income must be narrowly construed.” 515 U.S. at 328, 115 S.Ct. 2159. Schleier interpreted § 104(a)(2) as having a “critical requirement of being ‘on account of personal injury or sickness’ ” in order to be excludable, and it was considering a claim of recovery of back wages which it held not to be “ ‘on account of any personal injury.” Id. at 330, 331, 115 S.Ct. 2159.
In my view, the cogent dissent in Dotson held that Dotson “cannot avoid the fact that those cases [Mertens and Medina, supra ] classify his cause of action as one that does not redress personal injury.” Id. at 691 (citing Rivers v. Roadway Express, 511 U.S. 298, 114 S.Ct. 1510, 128 L.Ed.2d 274 (1994), a ease not considered by the Dotson majority); see also Harper v. Virginia Dep’t of Taxation, 509 U.S. 86, 97, 113 S.Ct. 2510, 125 L.Ed.2d 74 (1993)(not cited nor apparently considered by the Dotson majority). I would note also that the Dotson majority’s reliance on Redfield v. Insurance Co. of North America, 940 F.2d 542 (9th Cir.1991), has been severely undercut by its implicit overruling in Schleier, and the fact that it was decided before Burke.
I must confess that I am at a loss to understand that section of the majority opinion styled “Sixth Circuit’s View.” That seven page discussion cites to one Sixth Circuit case in passing — “See Allinder v. Inter-City Prods. Corp., 152 F.3d 544, 553 (6th Cir.1998) (embracing the criticism oí MeHens. ... ).” The two judges on the majority side joined the court’s decision in Allinder criticizing that Supreme Court decision. MeHens, of course, is binding on this court whether my two colleagues approve of it or not. Allinder was an ERISA case; the majority here concede that this is not an ERISA dispute. That same misnamed discussion footnotes *1029Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), also an ERISA case, which discusses fiduciary responsibility, definitely not an issue in this ease. (Footnote 11.) Varity Corp. also cites Mertens with apparent approval. The dictum in Al-linder is parroted by the majority, although Allinder is not, by any stretch, precedent for the majority decision, which is distinctly a minority view. The majority finally concedes that it is “displeased” with Mertens, but claims this viewpoint has not influenced its decision. In sum, there is no Sixth Circuit authority for the majority view, and this court is without authority to disregard or bypass Mertens. It seems evident to this writer that the majority takes a congressional subcommittee statement, contrary to the Supreme Court interpretation of ERISA, that it now will effectually develop “a Federal common law with respect to employee benefit plans, including the development of appropriate remedies, even if they are not specifically enumerated,” and they apply this notion to the issues in this non-ERISA case. (Footnote 11.)
Nor can this writer understand the majority’s unexplained conclusion that “the case is no longer ‘open on direct review’ ” so that the majority may somehow avoid application of Mertens contrary to Hemelt, Mayberry, and the dissenter in Dotson.
Mayberry and Hemelt point out that many of the circuits had held at the time of the Continental Can settlement that such damages, claimed to be personal injury damages, were not available under ERISA. Hemelt affirmed the decision of the district court, which also disagreed with the decision of the Dotson majority. Chief Judge Wilkinson in Hemelt concluded that the payments in question were essentially wages, relying on Mer-tens and Burke, and characterized what plaintiffs received as a “substantial benefit to which they were not entitled under law, namely the award of large sums of money for emotional and intangible injuries that ERISA section 502 does not compensate.”3 122 F.3d at 209. I agree with that rationale — finding that the plaintiffs must pay taxes on these benefits denies them a kind of “double windfall.” Id.
The exclusion sought by plaintiffs from taxation is narrowly construed, not broadly construed as the majority does in this case. For the reasons well-stated by Hemelt, May-berry, and the Dotson dissent, I would hold that the benefit payments received by plaintiffs are fully taxable for federal income and FICA purposes.

. The majority reluctantly concedes that "Supreme court case law ... may dictate that the Special Master incorrectly found that compensatory damages were allowed in the Continental settlement.” We should not be influenced, it seems to me, by University of Detroit, DePaul Business Law Journal and Arizona law review articles rather than reasoned decisions of the strong majority of views of circuit judges on the issues. See footnote 11.

. In Dotson, 87 F.3d at 687, the majority discusses the "Dotsons’ ERISA class action suit” as "one step removed.” At the least, Dotson recognized and discussed throughout ERISA complications and judicial interpretations of ERISA.

. See also Mayberry: "[h]ow the class may have characterized its damages does not control.” Further, it held that a court does not look exclusively to the "record the parties created in order to determine the tax character of a recovery." (Emphasis added.)