Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, June 1, 1994 TAG: 9406010077
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: Associated Press
DATELINE: NEW YORK LENGTH: Long
The dispute could ripple far beyond the confines of the world's leading computer company. A favorable outcome for these ex-employees ultimately could mean millions of dollars in tax refunds to other victims of the corporate downsizing that has reshaped American business.
The combatants face years in court with the Internal Revenue Service. But these workers generally have $4,000 to $30,000 at stake, enough to make several hundred want to fight.
They view their departing payment as a legal settlement, because they signed agreements not to sue IBM after they left. The IRS sometimes exempts from income tax certain kinds of settlements, such as personal injury awards and some types of discrimination, and the former IBM workers believe they qualify.
Many feel they could have raised age discrimination as an issue with their ex-employer if they hadn't promised not to sue.
"A lot of grief has been caused by these job cuts, and the fact that they have to pay this high tax hurts even more," said Lowell Hoffman, president of the National Organization of Downsized Employees. The group of mostly former IBM workers in Poughkeepsie, N.Y., has 1,500 members on the mailing list.
Although it won't comment specifically on the former IBM workers, the IRS disagrees, saying the broad agreement that people typically sign in a corporate cutback isn't meant to settle a specific injury.
But the IRS acknowledges some confusion within the agency. Refunds have gone out to a few people who signed such agreements, and an IRS spokesman said the agency is going after these "mistakes."
Hundreds of thousands of American workers have lost their jobs in recent years as companies have shrunk to become more efficient. Challenger Gray & Christmas, a Chicago-based employment consulting firm that tracks announcements of staff cutbacks, said more than 615,000 were announced in 1993 alone. That included layoffs and early retirements.
For this year, almost 229,000 job cuts had been announced through April, including such notably large reductions as 15,000 at AT&T Corp., up to 15,000 at Delta Air Lines and almost 17,000 at NYNEX Corp., a regional phone company.
"There's no question that most everybody who leaves a company today gets a severance of some kind," said John Challenger, executive vice president of the Chicago firm. "There's obviously a lot of dollars involved if the government were to allow people to receive these departure payments tax-exempt."
At the same time, many companies routinely require departing workers, particularly managers, to sign agreements waiving their right to sue. General Motors Corp., AT&T , Exxon Corp. and U S West Inc. have used them, company representatives say.
In March, the IRS discovered enough people were exempting their departure pay that it issued a public notice warning they might be flouting the law. The agency cited two 1993 federal court cases that found "waivers do not change the taxable nature of the severance pay."
Those cases, however, did not address pay as a legal settlement, and Tax Court case law appears to support the view of the former IBM workers.
Stuart Seigel, chief counsel of the IRS from 1977 to 1979 and now partner in the New York office of the Arnold & Porter law firm, is not involved in the IBM dispute but noted two legal hurdles the ex-employees face.
The first, he said, is proving IBM paid employees to settle potential age discrimination claims. The second hurdle is proving the payments fall within a category considered tax-exempt.
Since 1986, IBM has cut its global staff from more than 400,000 people to around 230,000, a pullback that has come to symbolize the corporate cost-cutting trend.
Under federal tax law, only workers who have left since 1990, an estimated 70,000 people, still can dispute their taxes.
Often, the payment for a departing IBM worker was a year's salary or more. For employees in their 40s or 50s, that could mean $50,000 to $80,000.
of 28 percent to 39 percent, since they were added to salary already earned.
While the organization and numbers of the former IBM workers give them an effective chance at challenging the IRS, some express reluctance for fear of harming the company.
"All these people who retired or left on a bridge to retirement, they're still very loyal," said Mel Deener, a leader of the North Carolina group.
"They're willing to join if we can assure them this action is against the IRS and not IBM."
So-called "alumni groups" of former IBM workers in Colorado, North Carolina and New York have been meeting with tax attorneys for several months. Some in Boca Raton, Fla., and Atlanta have been working on the issue for more than a year.
An attorney advising an ex-IBM group in Texas also is pursuing such tax claims for former workers of USAA, a large financial services firm. Group leaders say there's a good chance the work will be consolidated.
In IBM's case, the large mainframe computer industry it dominates has been undermined by technological advances in smaller computers that are less profitable to build and sell.
IBM likely wouldn't be a party to the dispute. But it could be put in the uncomfortable position of having to publicly explain how people chose or were chosen to leave in recent cost-cutting actions.
The company does not practice age discrimination and views the agreements with ex-employees as "prudent business," spokesman Scott Brooks said. He notes the average age of IBM's staff has increased slightly in recent years.
by CNB