ERISA damages not tax exempt.

• Author: Bowers, Jennifer J.
• Position: Employee Retirement Income Security Act

In 1989, several class action suits filed against Continental Can Company for violations of Section 510 of the Employee Retirement Income Security Act of 1974 (ERISA) were consolidated and a settlement agreement was reached under the supervision of a Special Master. The plaintiffs in these suits alleged that Continental Can had undertaken a plan to limit pension plan liabilities by terminating employees before they earned enough years of service to qualify for special pension benefits. As a result of the agreement Report and Recommendation of the Special Master, a total of $415 million was awarded to the members of the class in the final settlement agreement.

In 1992, the Dotsons received their settlement payment, which had income tax and FICA tax withheld. On their 1992 income tax return, they reported the settlement amount as wages, but late in 1993, amended their return, claiming the payment was excludible from income under Sec. 104(a) as a "tort-like" personal injury recovery. They also requested a refund of FICA taxes paid on these amounts on Form 843, Claim for Refund and Request for Abatement. The IRS denied the claims for refund and the taxpayers brought suit in district court.

In support of their claim, the taxpayers cited the findings of the Special Master that the settlement award included significant "tort-like" elements. The award constructed by the Special Master included compensation for "dignitary injuries" and "earnings impairment." Since damages received by suit or settlement...