UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
filed: January 6, 1989.
GEORGE W. SUTHERLAND, RICHARD C. COZZIE, HARRY B. SOMERS, WILLIAM STEVENS, JAMES R. FERRELL, NORMAN J. KRIEGER, ANTHONY W. MAZZEO, ALFRED E. HYDE, EARL J. GEOFFRION, RUTH A. LANGSTON, ANTHONY FREDICINE, CHARLES M. MC CORRISTIN, ROBERT E. SWACKHAMMER SR., H. O. WALTERS, JAMES R. HENRY, ROCCO AGRUSTI, JOHN G. ELKO, DALLAS D. HANN, JAMES W. GREGORY, LEROY D. KARBER, SERPHINE D. COLUMBUS, GARY N. ZECHMAN, JOSEPH A. SHIROKEY, HOWARD F. REED, S. L. CHRISTIE, JOHN L. DAVIS, CHARLES W. GAVIN, ALTON W. FLY, HOWARD GREEN, COVA M. GARVER, JAMES R. PETERS, JACK H. REEFER, THEODORE SCHMID, RONALD E. HIGGINS, EDWARD SOLKOSKE, FRANK J. PRIBBLE, JAMES R. PULVER, CHARLES L. KIDD, JR., JOSEPH D. ICKES, JAMES E. WILSEY, RUSSELL E. BOSLEY, DENVER E. BASHAM, ELMER HRICKO, CLAYTON HARTLEY, CHARLES WELCH, F. V. NORMAN, ROBERT HYSELL, ERNEST BAY, ROBERT F. FOLKINS, ARTHUR J. BALLUFF, JOHN J. MC CARTHY, JOHN HART, DEWEY PHILLIPS, NORMAN CHASTE, KENNETH HOUSER, WILLIAM J. RICHARDS, PAUL W. MUSHRUSH, ARTHUR A. WESTPHAL, G. W. DANCER, ROBERT E. LEE, STEPHEN H. HERRINGTON JR., J. F. JONES, HARRY F. GERDES JR., RICHARD C. KLEIN, FLOYD H. DODD, T. J. WEST, C. S. BOICE, F. C. SMITH, LEON W. FRIANT, EDMUND J. SUBBY, E. W. BOWMAN, JAMES L. COOPER, LEE E. WILLS, O. M. NEAR, JERRY J. ARNETTE, V. F. MINOR, J. P. KIERAN, WILLIAM H. EWAN, J. PAUL SEIFARTH, J. C. COX, J. F. NICHOLSON, INDIVIDUALLY AND ON BEHALF OF ALL OTHER RETIRED WORKERS WHO RECEIVED SEVERANCE PAY FROM CONSOLIDATED RAIL CORPORATION (CONRAIL) AND WILLIAM J. DONNELLY, W. A. HARRIS, FRANK MEZZI, FRANKLIN SHINGLER, PAUL L. BISE, ROBERT F. HABERLAND, FRANK L. JACKSON, PAUL D. PREZZIA, DONALD M. BARLOW, STEPHEN M. BARLOW
ROSCOE L. EGGER, JR., IN HIS OFFICIAL CAPACITY AS COMMISSIONER OF INTERNAL REVENUE FOR THE UNITED STATES OF AMERICA, AND CONSOLIDATED RAIL CORPORATION UNITED STATES OF AMERICA, APPELLANT
On Appeal From the United States District Court for the Western District of Pennsylvania, D.C. Civil No. 83-1352.
Gibbons, Chief Judge, and Becker and Rosenn, Circuit Judges.
Opinion OF THE COURT
BECKER, Circuit Judge.
The appeal in this tax refund case presents the question whether sums paid to former Conrail workers whose employment was terminated pursuant to a termination allowance provision enacted by Congress in 1981 as part of the railroad reorganization package are excluded from federal income taxation. Ruling on a motion for judgment on the pleadings, the district court found that the payments were excluded. We reverse.
Plaintiffs/appellants ("taxpayers") are twelve former Conrail workers. In 1982, they were awarded lump sums of up to $25,000 from Conrail upon termination of their employment. The payments were pursuant to 45 U.S.C. § 797a(a) (1982), which provides:
§ 797a. Termination allowance
Each taxpayer received less than the full amount of his gross benefit, however, because Conrail withheld income tax thereon which it in turn paid to the government. Taxpayers each filed a refund claim with the Internal Revenue Service seeking to recover the income tax withheld from his termination benefits. The claims were denied.
Taxpayers then instituted this suit in the district court for the Western District of Pennsylvania alleging that their termination benefits were specifically excluded from their gross income for tax purposes by 45 U.S.C. § 797(b), which provides:
(b) Treatment of benefits
Any benefits received by an employee under an agreement entered into pursuant to section 797 of this title and any termination allowance received under section 797a of this title shall be considered compensation solely for purposes of --
(1) the Railroad Retirement Act of 1974 (45 U.S.C. 231 et seq.); and
(2) determining the compensation received by such employee in any base year under the Railroad Unemployment Insurance Act (45 U.S.C. 351 et seq.).
The government moved for judgment on the pleadings and the taxpayers filed a response which the court treated as a cross-motion for judgment on the pleadings.*fn1 In a written opinion, the court denied the government's motion and granted taxpayers' cross-motion, concluding that the taxpayers were required to pay income tax on the termination benefits but that they could apportion the termination benefits to the years in which they were earned. Sutherland v. Egger, No. 83-1352 (W.D. Pa. Dec. 10, 1986).
The government moved for reconsideration. The district court granted the motion, concluding not only that the payments could not be apportioned over the years of employment,*fn2 but also that the termination allowances should not be treated as income subject to taxation at all. The effect of this judgment was to entitle the taxpayers to a full refund of the withheld taxes. The court reasoned that the wording of section 797d(b), stating that termination benefits shall be "compensation solely for purposes" of the Railroad Retirement Act of 1974 and the Railroad Unemployment Insurance Act, required that these payments not be treated as taxable income. This appeal followed.
The Internal Revenue Code broadly defines "gross income" as "all income from whatever source derived." 26 U.S.C. § 61(a) (1982). The Supreme Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted, see Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430, 99 L. Ed. 483, 75 S. Ct. 473 (1955), and has held that exclusions from taxation are not to be implied but must be unambiguously provided for. United States v. Wells Fargo Bank, 485 U.S. 351, 108 S. Ct. 1179, 1182, 99 L. Ed. 2d 368 (1988). The question here is whether 45 U.S.C. § 797d(b) unambiguously provides for a tax exclusion as taxpayers contend. While at first blush, given the use of the word "solely," it may appear that it does, we conclude that it does not for several reasons.
First, the statute does not expressly state that it grants an income tax exclusion. The relevant provisions do not even mention the word "tax." Silence generally may not be construed to create an exclusion from income tax. Commissioner v. Tellier, 383 U.S. 687, 693-94, 16 L. Ed. 2d 185, 86 S. Ct. 1118 (1966). This is particularly so when one considers that in other instances in which Congress wished to exclude income from taxation, including other instances dealing with railroad workers' income, it did so explicitly in the relevant statute. See, e.g., 45 U.S.C. § 352(e) (1982) (explicitly excluding railroad retirement annuities from taxation); 45 U.S.C. § 231m(a) (1982) (explicitly excluding railroad retirement annuities from taxation).
Second, section 797d(b) can be construed to have a purpose wholly independent of the exclusion of the separation allowances from income. For example, section 797d(b) could prevent the separation allowances from being considered "compensation" for the purpose of requiring payment of employer unemployment compensation contributions under 45 U.S.C. § 358(a) (1982), or "compensation" for the purpose of requiring the filing of employer returns of compensation under 45 U.S.C. § 356 (1982).
Third, section 797d(b) provides that "[a]ny benefits received by an employee . . . shall be considered compensation solely for purposes of . . ." (emphasis added). The term "compensation" is not synonymous with the term "income." Rather, compensation is a type of income as are, among other things, interest, rent, and alimony. 26 U.S.C. § 61(a). We conclude, therefore, that the use of the term "compensation," as opposed to the word "income," further supports our conclusion that the statute does not unambiguously provide for an exclusion from tax.*fn3
For the foregoing reasons, we hold that 45 U.S.C. § 797d(b) does not exclude taxpayers' separation allowances from income taxation. This decision is consistent with those of the two other courts that have considered the issue. See Herbert v. United States, 850 F.2d 32 (2d Cir. 1988), and Martin v. Commissioner, 90 T.C. 1078 (1988). The judgment of the district court will be reversed.