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Keywords

contractsettlementbreach of contractdamagesprecedent
settlementwill

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Cleveland Indians Baseball Co. v. U.S., Not Reported in F.Supp.2d, 1999 WL 72866, 83 A.F.T.R.2d 99-717, 99-1 USTC P 50,235

Facts

The Cleveland Indians paid FICA and FUTA taxes on settlement funds received from a $280 million fund created due to a collective bargaining agreement violation by Major League Baseball Clubs. The Indians disbursed these funds to former players in 1994, unsure of the tax implications. They later sought a refund, arguing that part of the funds were non-taxable interest and that the remaining funds were damages for a breach of contract, not wages. The government disputed these claims, asserting that all payments were wages subject to tax in the year received.

The Indians share of the settlement fund (which totaled $280 million) was $610,00.00 for the 1986 season and $1,457,848.00 for the 1987 season.

Issue

The main legal issue was whether the payments made by the Indians to former players constituted taxable wages for FICA and FUTA purposes, and to which tax years those wages should be allocated.

The remaining issue, on which the parties continue to disagree, is the question of to which tax year those wages are attributable for FICA and FUTA purposes.

Rule

The court applied the principle that a settlement for back wages should be allocated to the periods when the regular wages were not paid, rather than when the employer finally pays.

Thus, the Indians cite to and rely upon the Sixth Circuit's decision in Bowman v. United States, 824 F.2d 528 (6th Cir.1987) (Merritt, Martin and Brown), where the panel unanimously concluded that, '[A] settlement for back wages should not be allocated to the period when the employer finally pays but ‘should be allocated to the periods when the regular wages were not paid as usual.'

Analysis

The court followed the precedent set in Bowman v. United States, which stated that back wages should be allocated to the periods when they were originally due. The court found that the payments made in 1994 were effectively back-pay for the 1986 and 1987 seasons, during which the maximum FICA and FUTA taxes had already been satisfied. Therefore, the court ruled that the Indians were entitled to a refund of the taxes paid on these disbursements.

Accordingly, this Court will follow the course proposed by the Indians and dictated by Bowman.

Conclusion

The court concluded that the Cleveland Indians were entitled to a refund of $97,202.20 in FICA and FUTA taxes, plus interest, as the payments made were not subject to taxation in the years they were disbursed.

Judgment will be entered in favor of the Indians and the United States ordered to refund the $97,202.20 in FICA and FUTA taxes paid in connection with the 1994 settlement disbursements, plus interest from the dates on which such payments were made.

Who won?

Cleveland Indians Baseball Company prevailed in the case because the court found that a portion of the payments constituted non-taxable interest and that the remaining payments were back wages attributable to prior tax years.

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