Appeal from the Decision of the United States Tax Court. No. 11179-79 -- Richard C. Wilbur, Judge.
Wood, Cudahy and Coffey, Circuit Judges.
This case arises out of the 1977 United States federal income tax return filed by Leslie and Gladys Hintz. The Hintzes contend that they are entitled to certain deductions and a tax credit, which the Internal Revenue Service has disallowed. The United States Tax Court agreed with the IRS and ruled that the Hintzes had a deficiency in income tax due for the taxable year 1977 in the amount of $12,555.90. It is from this decision that the Hintzes appeal. We affirm the judgment of the Tax Court.
Leslie E. Hintz was employed as a locomotive engineer by the Soo Line Railroad Company. In September of 1971 Hintz was placed on sick leave by the Railroad following hospitalization for severe chest pain. Hintz ultimately underwent cardiopulmonary bypass surgery. Post-operative examinations, by Hintz's personal physician as well as the Railroad's company doctor, indicated that the heart operation had been successful and on October 13, 1972, Hintz reported back to work at the Railroad. The Railroad's medical director reexamined Hintz and, based upon the medical director's findings and conclusions, disqualified Hintz from returning to work as a locomotive engineer. Instead, Hintz was assigned as a relief towerman, a job paying a considerably lower wage than that of an engineer.
Hintz filed suit against the Railroad seeking return to his former position as engineer, alleging that the Railroad had discriminated against him because of his physical handicap (heart disease). The Wisconsin Department of Industry, Labor, and Human Relations reinstated Hintz to his former position of locomotive engineer and awarded backpay. On appeal, this decision was affirmed by the Circuit Court of Dane County, Wisconsin.
The parties then entered into negotiations and reached a settlement as to the amount of backpay to which Hintz was entitled. Hintz was awarded $50,000 in back wages covering the period from October of 1972 through May of 1976. The following deductions from the $50,000 were also agreed upon: (1) $10,000 in federal withholding tax; (2) $3,500 in State of Wisconsin withholding tax; (3) $1,716.51 in Railroad Retirement tax; (4) $1,689.10 in repayment to the Railroad Retirement Board for sickness insurance benefits previously drawn; and (5) $4,830.38 in repayment to the Railroad Retirement Board for unemployment insurance benefits previously drawn.*fn1 The deductions for repayment of the sickness and unemployment insurance benefits were uncontested and required by law. See 45 U.S.C. § 352(f). Hintz ultimately received the balance of the settlement, $28,264.01, in 1977.
On their 1977 federal income tax return, the Hintzes chose not to include the $50,000 settlement as income. The Internal Revenue Service, however, adjusted the Hintzes' reported income and included the $50,000. In part because of this substantial increase in income reported, it became advantageous for the Hintzes to itemize their deductions, something they had not previously done. Accordingly, the IRS, in computing the Hintzes' tax deficiency, itemized the Hintzes' deductions.
After the IRS notified the Hintzes of their tax deficiency, the Hintzes filed a petition for redetermination with the United States Tax Court. Their primary contention was that if the $50,000 backpay award was to be included as income, a deduction from income should be allowed for the repayment of the sick pay and unemployment benefits. The Hintzes also requested that they be either credited or refunded the difference between the amount of Railroad Retirement tax actually withheld from them in fiscal 1977 and the amount they alleged that properly should have been withheld. Finally, the Hintzes claimed that the amount allowed by the Commissioner as a property tax deduction should have been $746.75, rather than $660.00.
After having filed their petition for reconsideration with the Tax Court, the Hintzes filed an Amended Tax Form 1040-X with the IRS. In this tax return they reported the $50,000 backpay award as income, deducted the sick pay and unemployment benefits repaid to the Soo Line, and claimed a tax credit for the excess Railroad Retirement taxes paid. They also claimed a deduction of $746 for property taxes paid.
The United States Tax Court, however, rejected all of the Hintzes' contentions. The court first ruled that the sick pay and unemployment benefits that had been deducted from the $50,000 as a payback to the Railroad Retirement Board could not be deducted from income, reasoning that since the benefits had not initially been declared as income when they were received, no deduction should be allowed when they were repaid. As to the Hintzes' contention that they had overpaid their Railroad Retirement tax for 1977 and thus deserved a tax credit, the Tax Court held that it was without jurisdiction to decide the question. The court advised the Hintzes that if they felt they had overpaid, they should immediately apply for a refund with the Soo Line or the IRS. Finally, in view of the fact that the Hintzes had not submitted any evidence in support of their claim that they were entitled to a larger property tax deduction than the one already allowed by the IRS, the Tax Court ruled that the Hintzes were not entitled to a larger deduction. The Tax Court concluded that the Hintzes were deficient in their taxes in the amount of $12,555.90 and accordingly entered judgment in that amount. This appeal followed.
The first issue we address is the Hintzes' contention that they should be allowed to deduct the benefits subtracted from the $50,000 settlement ...