Opinion
Civil No. 00-356 ADM/AJB
June 22, 2001.
Charles R. Shreffler, Esq., Shreffler Law Firm, P.A., Minneapolis, MN and James L. Huston, Esq. and Zhu Lee, Esq., Foley Lardner, Milwaukee, WI, on behalf of Plaintiffs.
Rachel D. Cramer, Esq., and Charles P. Hurley, Esq., U.S. Dep't of Justice, on behalf of Defendant.
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
This matter is before the undersigned United States District Judge pursuant to Plaintiffs' Objections [Doc. No. 24] to the Report and Recommendation ("RR") of Magistrate Judge Arthur J. Boylan [Doc. No. 23]. In the RR, dated April 30, 2001, Judge Boylan recommends that Plaintiffs' Motion for Summary Judgment [Doc. No. 15] be granted with respect to Count I of the Complaint and denied with respect to Count II, and Defendant's Motion for Summary Judgment [Doc. No. 9, 12] on Count II be granted. For the reasons set forth below, the RR is adopted in its entirety.
II. BACKGROUND
In December of 1990, Major League Baseball Clubs ("Baseball Clubs"), including Plaintiffs Minnesota Twins Partnership and MTI Partnership ("Twins"), agreed to pay $280 million in a settlement agreement ("Settlement") with the Major League Baseball Players Association ("MLPA"). The Settlement arose out of grievances filed by the MLPA, in which it contended that the Baseball Clubs engaged in concerted action to not bid for free agents following the 1985, 1986, and 1987 seasons. Each of the 26 then-existing Baseball Clubs paid 1/26th of the total Settlement, and distribution was determined by the MLPA, subject to the approval of an arbitration panel. Distributions were made in 1994, 1995, and 1997.
On February 16, 2000, the Twins filed a Complaint [Doc. No. 1] against Defendant United States of America ("Government"), seeking a refund of taxes it paid under the Federal Insurance Contributions Act ("FICA"), 26 U.S.C. § 3101-3128, and the Federal Unemployment Tax Act ("FUTA"), 26 U.S.C. § 3301-3311, because of the Settlement. The Twins object to Judge Boylan's recommendation that summary judgement be granted for the Government on Count II, which concerns the taxes on the non-interest portion of the Settlement. Additional factual background for this matter is clearly and thoroughly set forth in the RR. The Court incorporates those facts by reference for the purposes of the present objections.
III. DISCUSSION
Summary judgment is appropriate where there is no genuine issue of material fact for trial and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56; Rolscreen Co. v. Pella Prods. of St. Louis, Inc., 64 F.3d 1202, 1208 (8th Cir. 1995) (citations omitted). Because this is a dispositive motion, the Court must make an independent, de novo evaluation of those portions of an RR to which objection is made and may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge. See 28 U.S.C. § 6369(b)(1)(C); D. Minn. LR 72.1(c)(2).
Judge Boylan determined that the "non-interest" portion of the Settlement distributions are "wages" for purposes of FICA and FUTA, and that summary judgment should be granted for the United States. Under FICA and FUTA, an employer must pay an excise tax that is measured as a percentage of wages paid to an employee. 26 U.S.C. § 3111(a), 3301. Under FICA and FUTA, the term "wages" means "all remuneration for employment" unless specifically excepted, 26 U.S.C. § 3121 (a), 3306(b), and the term "employment" means "any service, of whatever nature, performed . . . by an employee for the person employing him." 26 U.S.C. § 3121(b), 3306(c). "Service" is broadly defined to mean "`not only work actually done but the entire employer-employee relationship for which compensation is paid to the employee by the employer.'" Mayberry v. United States., 151 F.3d 855, 860 (8th Cir. 1998) (quoting Soc. Sec. Bd. v. Nierotko, 327 U.S. 358, 365 (1946)); see Lane Processing Trust v. United States, 25 F.3d 662, 665 (8th Cir. 1994).
In general, the tax consequences of distributions made through settlement agreements are determined by the nature of the underlying claim. See San Francisco Baseball Assocs. v. United States, 88 F. Supp.2d 1087, 1092-93 (N.D.Cal. 2000) (citing Getty v. Comm'r, 913 F.2d 1486, 1490 (9th Cir. 1990)). The nature of the underlying claim is determined by the payer's intent and the character of the settled claim, see Getty, 913 F.2d at 1490, and typically hinges on the "dominant reason" for making the payments, see Comm'r v. Duberstein, 363 U.S. 278, 286 (1960). In San Francisco Baseball Associates L.P. v. United States, the court held that the Settlement damage distribution's primarily aim was to compensate players. 88 F. Supp.2d at 1093-94. Likewise, here the money was paid because of a breach of an employment agreement. As such, there is a sufficient employment relationship between the harm the players incurred and their employment with the Twins, within the broad definition of "wages." See Mayberry, 151 F.3d at 860 (holding that an ERISA class action settlement, in which the class members' employment relationship with the employer was factored into the settlement, constitutes "wages" for purposes of FICA). The Settlement damage payments are an outgrowth of the employment relationship because they are compensation for violation of an employment agreement.
The Settlement provides that the money damages be paid from a single fund, with equal contributions from each Major League Baseball Club. As a result, only 1/26th of each player's damages comes from his specific employer, and 25/26th of each distribution was from a Club with which the recipient never had an employment relationship. In Newhouse v. McCormick Co., 157 F.3d 582, 585 (8th Cir. 1998), the Eighth Circuit held that the damage award in a case involving discrimination against a prospective employee was not "wages" because the settlement recipient was never hired. Id. at 586 (stating that the case "never involved either wages or employment"). In contrast, the harm the players incurred in the instant case is directly related to their actual employment with the Twins. See Mayberry, 151 F.3d at 860; Lane Processing Trust, 25 F.3d at 665; San Francisco Baseball, 88 F. Supp.2d at 1093-94. Because there is an employment relationship at the core of the Settlement and its damage award, the Government's Motion for Summary Judgment is granted on Count II. Phillies v. United States, No. Civ. A. 99-4054, 2001 WL 569268 (E.D.Pa. May 24, 2001); St. Louis Cardinals, L.P. v. United States, No. 4:00-CV-138 (E.D.Mo. May 11, 2001); San Francisco Baseball, 88 F. Supp.2d at 1093-94.
IV. CONCLUSION
Based upon the foregoing, the RR, and all of the files, records and proceedings herein, IT IS HEREBY ORDERED that:
(1) Plaintiffs' Objection [Doc. No. 24] to the Report and Recommendation [Doc. No. 23] is DENIED. The RR [Doc. No. 23] is ADOPTED in its entirety.
(2) Plaintiffs' Motion for Summary Judgment [Doc. No. 15] on Count I is GRANTED, with judgment for $7,592.90 plus interest.
(3) Plaintiffs' Motion for Summary Judgment [Doc. No. 15] on Count II is DENIED.
(4) Defendant's Motion for Summary Judgment on Count II [Doc. No. 9, 12] is GRANTED.
Because neither summary judgment motion concerns Count III, it is unaffected by this Order.