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No. 95-966. Argued October 9, 1996-Decided December 10, 1996*

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. § 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.


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. 82-90.

(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. 323, this Court came close to resolving the statute's ambiguity in the Government's favor when it

*Together with No. 95-977, O'Gilvie v. United States, also on certiorari to the same court.



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 332, n. 5, but does not apply to elements of damages that are "punitive in nature," id., at 332. 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. 82-87.

(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. 87-90.

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. 90-92.

66 F.3d 1550, affirmed.

BREYER, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and STEVENS, KENNEDY, SOUTER, and GINSBURG, JJ., joined. SCALIA, J., filed a dissenting opinion, in which O'CONNOR and THOMAS, JJ., joined, post, p. 94.

Stephen R. McAllister argued the cause for petitioners in No. 95-966. With him on the briefs were Robert M. Hughes, Jack D. Flesher, Gregory L. Franken, and David B. Sutton. Linda D. King argued the cause and filed briefs for petitioner in No. 95-977.

Kent L. Jones argued the cause for the United States.

With him on the briefs were Solicitor General Days, Acting Solicitor General Dellinger, Assistant Attorney General

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