A pro se plaintiff sued his former employer under the Age Discrimination in Employment Act. The case settled. The plaintiff did not want to pay taxes on the settlement. The Second Circuit says that he has to.
The case is Gerstenbluth v. Credit Suisse, decided on August 27. The case settled for $250,000. Plaintiff objected that Credit Suisse sent him a W-2 form to cover his withholding taxes under FICA, which pays in part for Social Security. While plaintiff "freely acknowledges" that settlement for back and front pay normally constitutes taxable wages, he says that this case is different because this settlement was "payment to drop the Appellant's complaint of Age Discrimination against Credit Suisse" and that since he received a severance package from his former employer and the parties did not discuss lost wages in settling the case, that this settlement is not really about lost wages. Nice try.
The Court of Appeals has not taken up an issue like this in a long time. The Court (Livingston, Lohier and Carney) tells us that these settlements are taxable. We look at the cause of action and the statute under which the plaintiff sued to determine what the settlement really covers. Under ADEA, you can get back and front pay but no pain and suffering (which is not subject to withholding taxes). The intent of the party paying out the settlement also bears upon whether it is taxable. The agreement required plaintiff to release all claims which, as noted above, would yield taxable awards for lost wages (as well as liquidated damages and attorneys fees) but not emotional distress. In referencing withholding taxes, the settlement agreement also reflects that management intended that the payout be taxable. This creates a "strong presumption" that the settlement is taxable.So while the plaintiff makes some creative arguments to avoid paying his taxes, he is going to have write a check to the IRS.
A noteworthy footnote in this case says that "[t]he IRS concedes that amounts awarded in lieu of attorney's fees and interest are not subject to FICA."