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O'Gilvie v. United States

December 10, 1996

KEVIN M. O'GILVIE AND STEPHANIE L. O'GILVIE, MINORS, PETITIONERS

v.

UNITED STATES

KELLY M. O'GILVIE, PETITIONER

v.

UNITED STATES



SYLLABUS BY THE COURT

Certiorari to the United States Court of Appeals for the Tenth Circuit

No. 95-966

Argued October 9, 1996

Decided December 10, 1996 *fn*

Petitioners, the husband and two children of a woman who died of toxic shock syndrome, received a jury award of $1,525,000 actual damages and $10 million punitive damages in a tort suit based on Kansas law against the maker of the product that caused decedent's death. They paid federal income tax insofar as the award's proceeds represented punitive damages, but immediately sought a refund. Procedurally speaking, this litigation represents the consolidation of two cases brought in the same Federal District Court: the husband's suit against the Government for a refund, and the Government's suit against the children to recover the refund that the Government had made to the children earlier. The District Court found for petitioners under 26 U. S. C. Section(s) 104(a)(2), which, as it read in 1988, excluded from "gross income," the "amount of any damages received . . . on account of personal injuries or sickness." (Emphasis added.) The court held on the merits that the italicized language includes punitive damages, thereby excluding such damages from gross income. The Tenth Circuit reversed, holding that the exclusionary provision does not cover punitive damages.

Held:

1. Petitioners' punitive damages were not received "on account of" personal injuries; hence the gross-income-exclusion provision does not apply and the damages are taxable. Pp. 2-11.

(a) Although the phrase "on account of" does not unambiguously define itself, several factors prompt this Court to agree with the Government when it interprets the exclusionary provision to apply to those personal injury lawsuit damages that were awarded by reason of, or because of, the personal injuries, and not to punitive damages that do not compensate injury, but are private fines levied by civil juries to punish reprehensible conduct and to deter its future occurrence. For one thing, the Government's interpretation gives the phrase "on account of" a meaning consistent with the dictionary definition. More important, in Commissioner v. Schleier, 515 U. S. ___, this Court came close to resolving the statute's ambiguity in the Government's favor when it said that the statute covers pain and suffering damages, medical expenses, and lost wages in an ordinary tort case because they are "designed to compensate . . . victims," id., at ___, n. 5, but does not apply to elements of damages that are "punitive in nature," id., at ___. The Government's reading also is more faithful to the statutory provision's history and basic tax-related purpose of excluding compensatory damages that restore a victim's lost, nontaxable "capital." Petitioners suggest no very good reason why Congress might have wanted the exclusion to have covered these punitive damages, which are not a substitute for any normally untaxed personal (or financial) quality, good, or "asset" and do not compensate for any kind of loss. Pp. 2-8.

(b) Petitioners' three arguments to the contrary-that certain words or phrases in the original, or current, version of the statute work in their favor; that the exclusion of punitive damages from gross income may be justified by Congress' desire to be generous to tort victims and to avoid such administrative problems as separating punitive from compensatory portions of a global settlement or determining the extent to which a punitive damages award is itself intended to compensate; and that their position is supported by a 1989 statutory amendment that specifically says that the gross income exclusion does not apply to any punitive damages in connection with a case not involving physical injury or sickness-are not sufficiently persuasive to overcome the Government's interpretation. Pp. 8-11.

2. Petitioners' two case-specific procedural arguments-that the Government's lawsuit was untimely and that its original notice of appeal was filed a few days late-are rejected. Pp. 12-14. Justice Breyer

On Writs of Certiorari to the United States Court of Appeals for the Tenth Circuit

Internal Revenue Code Section(s) 104(a)(2), as it read in 1988, excluded from "gross income," the

"amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness." 26 U. S. C. Section(s) 104(a)(2) (1988 ed.) (emphasis added).

The issue before us is whether this provision applies to (and thereby makes nontaxable) punitive damages received by a plaintiff in a tort suit for personal injuries. We conclude that the punitive damages received here were not received "on account of" personal injuries; hence the provision does not apply and the damages are taxable.

I.

Petitioners in this litigation are the husband and two children of Betty O'Gilvie, who died in 1983 of toxic shock syndrome. Her husband, Kelly, brought a tort suit (on his own behalf and that of her estate) based on Kansas law against the maker of the product that caused Betty O'Gilvie's death. Eventually, he and the two children received the net proceeds of a jury award of $1,525,000 actual damages and $10 million punitive damages. Insofar as the proceeds represented punitive damages, petitioners paid income tax on the proceeds but immediately sought a refund.

The litigation before us concerns petitioners' legal entitlement to that refund. Procedurally speaking, the litigation represents the consolidation of two cases brought in the same Federal District Court: Kelly's suit against the Government for a refund, and the Government's suit against the children to recover the refund that the Government had made to the children earlier. 26 U. S. C. Section(s) 7405(b) (authorizing suits by the United States to recover refunds erroneously made). The Federal District Court held on the merits that the statutory phrase "damages . . . on account of personal injury or sickness," includes punitive damages, thereby excluding punitive damages from gross income and entitling Kelly to obtain, and the children to keep, their refund. The Court of Appeals for the Tenth Circuit, however, reversed the District Court. Along with the Fourth, Ninth and Federal Circuits, it held that the exclusionary provision does not cover punitive damages. Because the Sixth Circuit has held the contrary, the Circuits are divided about the proper interpretation of the provision. We granted certiorari to resolve this conflict.

II.

Petitioners received the punitive damages at issue here "by suit,"-indeed "by" an ordinary "suit" for "personal injuries." Contrast United States v. Burke, 504 U. S. 229 (1992) (Section(s) 104(a)(2) exclusion not applicable to backpay awarded under Title VII of the Civil Rights Act of 1964 because the claim was not based upon " `tort or tort type rights,' " id., at 233); Commissioner v. Schleier, 515 U. S. ___ (1995) (alternative holding) (Age Discrimination in Employment Act of 1967 (ADEA) claim is similar to Title VII claim in Burke in this respect). These legal circumstances bring those damages within the gross-income-exclusion provision, however, only if the petitioners also "received" those damages "on accountof " the "personal injuries." And the phrase "on account of " does not unambiguously define itself.

On one linguistic interpretation of those words, that of petitioners, they require no more than a "but-for" connection between "any" damages and a lawsuit for personal injuries. They would thereby bring virtually all personal injury lawsuit damages within the scope of the provision, since: "but for the personal injury, there would be no lawsuit, and but for the lawsuit, there would be no damages." On the Government's alternative interpretation, however, those words impose a stronger causal connection, making the provision applicable only to those personal injury lawsuit damages that were awarded by reason of, or because of, the personal injuries. To put the matter more specifically, they would make the section inapplicable to punitive damages, where those damages

" `are not compensation for injury [but] [i]nstead . . . are private fines levied by civil juries to punish reprehensible conduct and to deter its future occurrence.' " Electrical Workers v. Foust, 442 U. S. 42, 48 (1979), quoting Gertz v. Robert Welch, Inc., 418 U. S. 323, 350 (1974) (footnote omitted).

The Government says that such damages were not "received . . . on account of" the personal injuries, but rather were awarded "on account of " a defendant's reprehensible conduct and the jury's need to punish and to deter it. Hence, despite some historical uncertainty about the matter, see Rev. Rul. 75-45, 1975-1 Cum. Bull. 47, revoked by Rev. Rul. 84-108, 1984-2 Cum. Bull. 32, the Government now concludes that these punitive damages fall outside the statute's coverage.

We agree with the Government's interpretation of the statute. For one thing, its interpretation gives the phrase "on account of " a meaning consistent with the dictionary definition. See, e.g., Webster's Third New International Dictionary 13 (1981) ("for the sake of: by reason of: because of ").

More important, in Schleier, supra, we came close to resolving the statute's ambiguity in the Government's favor. That case did not involve damages received in an ordinary tort suit; it involved liquidated damages and backpay received in a settlement of a lawsuit charging a violation of the Age Discrimination in Employment Act. Nonetheless, in deciding one of the issues there presented (whether the provision now before us covered ADEA liquidated damages), we contrasted the elements of an ordinary tort recovery with ADEA liquidated damages. We said that pain and suffering damages, medical expenses, and lost wages in an ordinary tort case are covered by the statute and hence excluded from income

"not simply because the taxpayer received a tort settlement, but rather because each element . . . satisfies the requirement . . . that the damages were received `on account of personal injuries or sickness.' " Id., at ___ (slip op., at 6-7).

In holding that ADEA liquidated damages are not covered, we said that they are not "designed to compensate ADEA victims," id., at ___, n. 5 (slip op., at 9, n. 5); instead, they are " `punitive in nature,' " id., at ___ (slip op., at 8) (quoting Trans World Airlines, Inc. v. Thurston, 469 U. S. 111, 125 (1985)).

Applying the same reasoning here would lead to the conclusion that the punitive damages are not covered because they are an element of damages not "designed to compensate . . . victims," Schleier, 515 U. S., at ___ (slip op., at 9, n. 5); rather they are " `punitive in nature.' " Ibid. Although we gave other reasons for our holding in Schleier as well, we explicitly labeled this reason an "independent" ground in support of ...


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