The opinion of the court was delivered by: FULLAM
This case is a taxpayers' refund suit contesting the legality of a deficiency assessment of $658.00, plus interest of $95.73, which the taxpayers paid on October 2, 1964. When the case was called for trial, a stipulation of facts was submitted, and oral argument was heard on the legal issues.
The dispute involves the proper tax treatment of a lump sum payment of $15,701.28 made to the wife-taxpayer by the School District of Philadelphia on June 20, 1961. Mrs. Brodsky was discharged as a teacher by the school district on May 28, 1954, but on June 30, 1960 the Supreme Court of Pennsylvania held that the discharge was improper,
and Mrs. Brodsky was reinstated in February of 1961. During the period of discharge, Mrs. Brodsky engaged in other employment; however, she was ready, willing, and able to perform services as a public school teacher during this period. The lump sum payment represents the difference between her earnings through other employment during the period of discharge, and what her earnings would have been had she not been improperly discharged.
There is no dispute that the requirements of section 1303(a) are met, but the government does dispute the taxpayers' contention that the payment was back pay within the meaning of section 1303(b).
To be considered as back pay, the funds must be "remuneration . . . and other similar compensation . . . for services performed . . .": Section 1303(b)(1). The government's position is that, since Mrs. Brodsky did not perform services during her period of discharge, section 1303(b)(1) is not applicable. This construction is too narrow, and it is rejected by this Court.
The government relies on Stearns v. Commissioner, 14 TC 420 (1950), affirmed per curiam, 189 F.2d 259 (6th Cir. 1951), to support its position. There the Tax Court held that back-pay treatment could not be accorded to a lump sum settlement of a suit brought by the taxpayer against his employer. Although the court at one point emphasized that part of section 1303 relating to "services performed", it is impossible to conclude definitely that this was the reason for the court's decision. A release was executed by Mr. Stearns in favor of his employer which waived his rights to breach of contract damages, employment, election as an officer of the company, and stock options. The court then concluded:
"It seems to us that the $15,000 which Stearns received on December 21, 1945, in . . . settlement . . . was not received as 'remuneration' for prior services rendered . . . 'the payment of which has been deferred by reason of the unusual circumstances of the type specified in the definition,' as described by the conference committee in its report." 14 TC at 425.
In point of fact, the court was apparently relying on the reason for deferment of payment (subparts (A) through (D) of section 1303(b)(1)), and not on when the services were rendered. In sum then, Stearns does not necessarily provide direct support for the government's position.
The Commissioner cited 5 U.S.C. § 652 (b) (presently recodified and amended, 5 U.S.C. § 5596), which provided that a wrongfully discharged employee "shall for all purposes except the accumulation of leave be deemed to have rendered services during such period," as the basis for allowing back-pay treatment. The Pennsylvania Education Code does not contain a similar provision. However, nothing to the contrary is provided, and Mrs. Brodsky was in fact treated, for all purposes, as if she had rendered services to the school system during her period of discharge.
Therefore, assuming that section 1303(b)(1) requires either that actual services be performed, or that services be deemed to be performed, I am persuaded that there was constructive performance of services in this case.
There is also significant doubt that section 1303(b)(1) requires that services be actually or constructively performed. As Judge Disney pointed out in his dissenting opinion in Stearns, supra at 425, section 1303(b)(1)(B) applies to payments which would have been paid but for the intervention of a "dispute as to liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings." Since the statute specifies the existence of a dispute and the institution of a lawsuit, it would appear that instances in which an employee leaves the employ of his employer, and subsequently sues for his lost wages, are contemplated by the section.
Therefore, section 1303(b)(1) would apply to situations where an employee remains in the employ of his original employer, and situations in which the employee remains available to resume his employment, notwithstanding the fact he has undertaken interim employment during the litigation of his lawsuit. Under this interpretation, Mrs. Brodsky would clearly be entitled to the benefits of section 1303.
The payment in question was made to an employee pursuant to a contract for services. Under any common-sense appraisal of the realities of the situation, this was "back-pay." To hold otherwise would be utterly inconsistent with the apparent intent of Congress as expressed in section 1303.
In light of the disposition which I have made of the taxpayers' section 1303(b)(1)(B) claim, it is not necessary to determine the alternative claims that section 1303(b)(1)(C) and section 1303(b)(3) also apply. Furthermore, there is no necessity to decide whether it is permissible for the taxpayers to rely now on section 1305, relating to damage awards received pursuant to a judicial decree, even though this legal theory was not asserted ...