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Reporting Workers' Comp on W-2 May Result in Liability Under Section 7434

(Parker Tax Publishing August 2023)

The D.C. Circuit reversed a grant of summary judgment by a district court to an employer that was sued by an employee under Code Sec. 7434 for willfully including nontaxable workers' compensation payments on the employee's Forms W-2. The D.C. Circuit found that the willfulness requirement under Code Sec. 7434 is satisfied if the employer knowingly or recklessly filed a false return and does not require specific intent. Doherty v. Turner Broadcasting System, Inc., 2023 PTC 180 (D.C. Cir. 2023).


Martin Doherty worked as a photojournalist for Turner Broadcasting Systems, Inc. (Turner), for over fifteen years. In late 2012, he injured himself loading camera equipment while at work. As a result, he needed medical treatment and was unable to perform his job. Turner compensated him in lieu of his wages for those injuries.

Turner has a workers' compensation policy and a short-term disability policy for compensating employees on leave due to an injury. Under Turner's workers' compensation policy, an employee who has a job-related injury remains on Turner's payroll for 26 weeks and is paid a percentage of the employee's base salary. Under the short-term disability policy, which compensates workers who are absent from work for any illness or injury that makes it medically necessary to miss work for longer than 7 days, Turner pays generally the same percentages as under the workers' compensation policy. Turner receives tax deductions for payments it makes under the disability policy.

In Turner's view, it compensated Doherty under the latter - its disability policy - although it also asserted that it "fulfills its workers' compensation obligation" through that policy. Doherty, on the other hand, believed that he was paid workers' compensation, to which he was entitled under District of Columbia law. Accordingly, he filed a claim with the D.C. Office of Workers' Compensation for his 2012 injury. The Office ruled that his injury was work related and that he was therefore entitled to 2/3 of his average salary.

The Forms W-2, Wage and Tax Statement, that Turner filed on Doherty's behalf for tax years 2014- 2016 included as part of Doherty's gross taxable income all of his injury-related compensation. Doherty sued Turner, seeking damages under Code Sec. 7434 based on his allegation that Turner willfully filed fraudulent W-2s on his behalf. A district court granted summary judgment for Turner, and Doherty appealed to the D.C. Circuit.

Code Sec. 7434 creates a private cause of action if "any person willfully files a fraudulent information return with respect to payments purported to be made to any other person." Turner argued that it was not liable to Doherty under Code Sec. 7434 because it lacked the requisite mental state requirement. Specifically, Turner contended that the use of the word "fraudulent" in the statute meant that Doherty had to prove Turner's "intentional wrongdoing" and "intent to deceive." According to Turner, "willfully" in this context cannot encompass mere recklessness. In addition, Turner argued that Doherty's W-2s were not inaccurate because they did not misstate the total amount of compensation that Doherty received. Turner further asserted that it paid Doherty directly under the disability plan all along and, since disability payments are taxable under Code Sec. 104(a)(3), Turner maintained a good faith belief that Doherty's W-2s were accurate.


The D.C. Circuit reversed the district court's judgment and reinstated Doherty's Code Sec. 7434 claim. In the view of the D.C. Circuit, Doherty's claim survived summary judgment because (1) his 2014- 2016 W-2s were information returns, (2) there was a factual question whether Turner acted knowingly or recklessly, and (3) there was a factual question as to whether they were false as to the amount paid.

In the court's view, Turner had not only ample notice but actual knowledge that Doherty's injuries were job-related and that related payments therefore fell under its workers' compensation policy. The court noted that Doherty filed a workers' compensation claim in 2013, of which Turner was aware, and Turner did not dispute the determination by the D.C. Office of Workers' Compensation that Doherty's injuries were work-related. The court rejected Turner's reading of Code Sec. 7434 to require intentional wrongdoing after finding that such a requirement would be departure from the common law definition of the terms "fraudulent" and "willful." The court reasoned that Congress reinforced "willfully" with "fraudulent" in Code Sec. 7434, and by doing so incorporated the common-law meaning of fraud. That traditional meaning, according to the court, encompasses actions taken either knowingly or in reckless disregard of the law. Further, the court said that by relying entirely on the word "fraudulent," Turner's interpretation essentially read the word "willfully" out of the statute.

Observation: The court observed that Doherty would likely survive summary judgment even if he were held to the higher standard of having to show specific intent. The court noted that Doherty received an email from a Turner Risk Management employee stating that workers' compensation payments are not taxable income. Further, the court said that a reasonable jury could infer that Turner intentionally misreported the payments as disability for the purpose of evading taxes, as it had a financial motive for doing so because it received tax deductions as a result. The court also pointed out that Doherty began alerting Turner to the taxability of his injury-related payments by October 2015, and even filed a substitute W-2 with the IRS for 2015.

The court was not persuaded by Turner's argument that Doherty's W-2s were not false as to the amount paid. Under Code Sec. 104(a)(1), workers' compensation payments are excluded from gross income. The court therefore found that if Turner included workers' compensation payments in Doherty's gross income, each W-2 by definition contained a misrepresentation as to the amount paid because if Turner properly excluded Doherty's workers' compensation, the amount of taxable gross income on the W-2s would have been different.

Finally, the court rejected Turner's argument that it paid Doherty under the disability plan all along. The court said that Turner may be able to persuade a jury about its good faith belief that it was not paying Doherty workers' compensation, despite the fact that it acknowledged Doherty's injuries were job-related, and in light of its own policies plus its assertion that it somehow fulfills its workers' compensation obligations through that disability policy. However, the court concluded that it could not credit that conclusion as a matter of law and summary judgment was therefore unwarranted on that basis.

For a discussion of actions for civil damages for the fraudulent filing of information returns, see Parker Tax ¶262,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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