UNITED WAY EX-PRESIDENT'S FORFEITED SALARY EXCLUDED FROM WITHHOLDING REQUIREMENTS.

                    UNITED STATES DISTRICT COURT

[2] On appeal, the Second Circuit affirmed all but one aspect of that award, remanding the case for a determination of whether Aramony was entitled to a certain portion of the pension benefits. See Aramony v. United Way Replacement Benefit Plan, 191 F.3d 140, 150-53 (2d Cir. 1999) ("Aramory II"). ¹ The remand issue involved $1,348,914 of the pension benefits originally awarded to Aramony. See Aramony v. United Way Replacement Benefit Plan, 86 F.Supp.2d 199, 202 (S.D.N.Y. 2000) ("Aramony III"). The remaining award of $1,872,143 in pension benefits to Aramony was affirmed. Id. On remand, this Court reaffirmed its initial award of $3,221,057 in pension benefits to Aramony. See id. at 206. UWA's appeal of that decision is pending. The parties now ask this Court to address several issues affecting the payment of that portion of the award not in dispute.

I. BACKGROUND

[3] I will assume familiarity with the prior opinions in this case, which describe in detail the facts and procedural history. See Aramony I, 28 F.Supp.2d at 153-66; Aramony II, 191 F.3d at 143-47; Aramony III, 86 F.Supp.2d at 200-02. Nevertheless, I will summarize briefly the facts relevant to the disputed issues.

[4] In Aramony I, UWA was ordered to pay Aramony pension benefits in the amount of $3,221,057 and prejudgment interest on that award in the amount of $1,177,121.39. See 28 F.Supp.2d at 184-85. At the same time, Aramony was required to repay UWA $951,250 in salary earned from 1989-1992, as well as consequential damages in the amount of $232,138, prejudgment interest in the amount of $788,555.92, and punitive damages in the amount of $50,000, all totaling $2,021,943.92. See id. at 185.

[5] Following this Court's remand opinion, the parties discussed payment of that portion of the award affirmed by the Second Circuit. On February 7, 2000, UWA notified Aramony that "after taxes, the distribution nets no payment to Aramony and leaves $68,811.21 still outstanding on Aramony's debt to UWA." See February 7, 2000 Letter from Paul J. Ondrasik, Jr., counsel for UWA, to Dennis Houdek, counsel for Aramony, Ex. A to the Affirmation of Dennis Houdek, Esq. ("Houdek Aff."), at 2. This calculation is based on federal and state withholding deductions on the full $1,872,143, as well as deductions for the New York State Consent Judgment. ² See id.

[6] Aramony disputes this calculation, arguing that the $1,872,143,in RBP benefits is not subject to withholding and that the net judgment due him is $534,280. See April 3, 2000 Letter from Dennis Houdek to this Court. This net judgment amount of $534,280 is arrived at by taking the principal uncontested RBP benefit of $1,872,143, adding a pro rata share of prejudgment interest ($684,081), and subtracting the amount of UAW's counterclaim ($2,021,943.92). Aramony also argues that payment of his counsel fees from this net judgment is not subject to withholding. See Plaintiff's Memorandum of Law in Support of His Motion to Enforce Judgment at 2.

II. DISCUSSION

[7] Aramony raises the following issues regarding UWA's calculation of its payment to him: (1) whether UWA should withhold taxes on the gross amount of the pension benefits awarded to him and, if not, on what amount, if any, should taxes be withheld; (2) whether UWA should withhold any taxes on the amount of the judgment paid to Aramony's attorneys in fees; and (3) whether UWA should offset the amount of its payment to Aramony by a judgment secured against Aramony by the Office of the Attorney General of the State of New York.

A. THE AMOUNT OF PENSION BENEFITS SUBJECT TO WITHHOLDING

[8] There appears to be confusion as to the difference between taxable income and amounts subject to withholding. While income tax is imposed on taxable income, withholding is confined to wages only. See Joint Sch. Dist. No. 1, City of Port Washington, Village of Saukville, Town of Grafton, Port Washington and Saukville, County of Ozaukee, State of Wisconsin v. United States, 577 F.2d 1089, 1091 (7th Cir. 1978). As the Supreme Court stated:

[9] The two concepts income and wages obviously are not necessarily the same. Wages usually are income, but many items qualify as income and yet clearly are not wages.

[10] Central Illinois Pub. Serv. Co. v. United States, 435 U.S. 21, 25 (1978). With this distinction in mind, the next step is to determine what amount, if any, of the RBP benefits are subject to withholding.

[11] The tax treatment of damage awards is governed by the nature of the item for which the ward [sic] is a substitute. See Alexander v. Internal Revenue Service, 72 F.3d 938, 942 (1st Cir. 1995) ("classification of amounts received in settlement of litigation is to be determined by the nature and basis of the action settled"). Because the RBP benefits constitute remuneration for services performed by an employee for his employer, they are considered wages for purposes of withholding. ³ See IRC section 3401; see also Rev. Rul. 82-176 (payments under a deferred compensation plan are wages for purposes of section 3401); Rev. Rul. 82-46 (payments under an eligible state deferred compensation plan are subject to income tax withholding).

[12] It does not necessarily follow, however, that because the RBP benefits are considered wages, the full amount of such benefits ($1,872,143) is subject to withholding. As noted earlier, Aramony is required to forfeit $951,250 in salary to UWA. This salary was originally earned between 1989 and 1992 and, presumably, UWA withheld taxes at the time of payment while Aramony recognized income. Thus, if the $951,250 in forfeited salary is not subtracted from the $1,872,143 in RBP benefits, there would be over-withholding.

[13] This conclusion is arrived at by applying the "claim of right" doctrine. That doctrine states:

     If a taxpayer receives earnings under a claim of right and

[15] Because Aramony is simultaneously receiving $1,872,143 in RBP benefits and returning $951,250 in salary, which he will presumably take as a deduction from taxable income, the net amount subject to withholding by UWA is $920,893. See Fender Sales, Inc. v. Commissioner of Internal Revenue, T.C. Memo 1963-119, 1963 WL 1526 (Tax Ct. 1963), rev'd on other grounds, 338 F.2d 924 (9th Cir. 1964). Using the percentages previously applied by UAW for withholding, 28% and 6% for federal and state respectively, yields federal withholding of $257,850 and state withholding of $55,253.58. Excluding post- judgment interest, the net amount due Aramony is $221,238.23 ($1,872,143 + $684,142.73 - $2,021,943.92 - $257,850 - $55,253.58). From this amount, Aramony's attorneys' fees should be paid directly to the firm of Curan Callahan Gale & Houdek, LLP, without any additional withholding by UWA. ⁴

     B. CAN UWA DEDUCT THE NEW YORK STATE CONSENT JUDGMENT FROM THE

III. CONCLUSION

[17] For the foregoing reasons, for that portion of the award affirmed by the Second Circuit, UWA is liable to Aramony in the amount of $221,238.23. From this amount, Aramony's attorneys' fees will be paid directly to Aramony's attorneys without any additional withholding. In addition, UWA is required to pay post-judgment interest on the gross award, including the amounts withheld by UWA, at the rate provided for in 28 U.S.C. section 1961, from November 20, 1998 to the date of payment. Plaintiff is directed to prepare a Proposed Judgment and, upon receipt, the Clerk of the Court is directed to close this case.

     [18] SO ORDERED:

² On the $1,872,143 in pension benefits, UWA proposed federal withholding of $524,200.04 and state withholding of $107,648.22. In addition, UWA also deducted the $100,000 Consent Judgment and $10,627.43 in post-judgment interest relating to that Judgment. See Houdek Aff. Ex. A at 2.

³ Contrary to plaintiff's argument, Aramony cannot avail himself of IRC section 3405 and elect to have no withholding apply with regard to this payment. Under section 3405, an individual can opt out of withholding for any nonperiodic distribution. See section 3405(b)(2)(A). The term "nonperiodic distribution" is defined as any "designated distribution" which is not a periodic payment. See section 3405(e)(3). The term "designated distribution," however, does not include any amount which is considered wages without regard to section 3405. See section 3405(e)(1)(B)(i). Because the RBP benefits are considered wages, they do not qualify as a designated distribution and, perforce, do not qualify as a nonperiodic distribution. The election provisions of section 3405 are, therefore, inapplicable here.

⁴ Whether the amount paid as attorneys' fees is income to Aramony is an issue best left for Aramony, his accountant and the Internal Revenue Service. While the defendants appear to concede that the amount of the award subject to an attorney's lien is not taxable income to Aramony, see Memorandum of Law of Defendant United Way of America Response to Plaintiff's Motion to Enforce the Judgment at 2, there seems to be a difference of opinion among the circuits on this issue. Compare Cotnam v. Commissioner of Internal Revenue, 263 F.2d 119, 126 (5th Cir. 1959)(amount of contingent fee paid by taxpayer to her attorneys was not income to her and was to be excluded from her gross income) and Davis v. Commissioner of Internal Revenue, 210 F.3d 1346, 1347 (11th Cir. 2000) (affirming Tax Court's finding that amount paid to plaintiff's attorneys was not taxable income under Cotnam) with Alexander, 72 F.3d at 943 (legal fees could not be offset against settlement proceeds which were entirely includable as ordinary income in taxpayer's gross income) and Kenseth v. Commissioner of Internal Revenue, 114 T.C No. 26, 2000 WL 669977 (Tax Ct. 2000) (amount retained by attorney as fees was includable in plaintiff's gross income as court declined to follow the reasoning of Cotnam). Regardless of whether Aramony's attorneys' fees are income to him or not, they do not constitute wages and, as a result, are not subject to withholding.