The $20,000 Sweepstakes For Folks Who Got The Ax

In April, 1993, Howard Aronoff reluctantly accepted an early retirement package from IBM, his employer of nearly 30 years. Like thousands of other workers in the massive wave of corporate downsizings, the software development planner, then 53, received a lump-sum payment based on his years of service.

The catch: To get the money, Aronoff had to sign a form promising not to sue IBM later. Although the form covered any type of employment-related litigation that Aronoff might consider, it singled out lawsuits alleging age discrimination. Thinking little of it at the time, Aronoff signed the waiver, collected his money, and eventually paid taxes of $30,000. "Like millions of Americans, we were being confronted with many things we didn't understand," Aronoff says.

But now that waiver, demanded routinely by companies reducing their workforces, is at the center of a legal battle brewing between thousands of downsized employees and the Internal Revenue Service. At issue is whether the buyout payments should be treated as severance pay or as settlements against future age discrimination claims, which may be tax-free. "This was like settling a case before it was even thought of," says Lowell E. Hofmann, who last year, with fellow ex-IBMer Aronoff, founded the National Organization of Downsized Employees Inc. (NODE).

BIG KITTY. Few prospects are less appealing than picking a fight with the IRS. Yet in a fairly stunning grassroots initiative, more than 5,000 ex-IBMers, as well as hundreds of former employees from corporate giants such as AT&T, Mobil, Boeing, and others have joined forces to take on the agency. NODE, operating out of Hofmann's cramped home-office in rural Salt Point, N.Y., has mushroomed from just a handful of downsized IBMers in New York to 4,300 members from 200 companies in 47 states. Another corporate alumni group, the Workforce Reduction Assistance Program, based in Raleigh (N.C.), is growing at an equally frantic pace.

Indeed, the organizations each have amassed legal war chests of about $1.5 million thus far--via NODE's $600 contributions from each of the former IBMers who have joined the suits. Alumni from other companies are building their own legal treasuries. Raleigh tax lawyer Royce Powell is representing groups made up of at least 300 former employees per company who chip in $375 a head. Several small groups already have filed suit. The bigger outfits expect to take the IRS to court later this year, after the agency rejects requests for refunds--which may average about $20,000--filed with employees' 1994 tax returns.

Each corporate group must bring its own case because the success of the actions will hinge on proving that each company paid the dismissed employees settlements to avoid future litigation--not that they were simply given taxable buyout packages. In the IBM matter, for example, lawyers must show that the company compensated displaced workers to avoid facing charges such as age discrimination. "The money was not given to the individual out of the goodness of IBM's heart," says Robert David Goodstein, who represents about 80 IBMers. "Instead, it was given because IBM was afraid of litigation."

STAYING ALOOF. The ex-workers have sought help from their former employers, who themselves stand to recoup millions of dollars in Social Security contributions. One lawyer's estimate puts IBM's potential refund related to its buyouts at $250 million. So far, however, no company is biting. "It's an issue between former employees and the IRS," says a spokesman for IBM, who adds that Big Blue believes that employee buyout packages should be taxed as regular income.

It's certain that convincing the IRS otherwise won't be easy. For the moment, the agency isn't talking, citing pending litigation. But tax experts say it is likely to argue that since the workers merely signed general waivers releasing companies from future liability, rather than actually bringing discrimination charges, the payments can't be viewed as nontaxable settlements. "Without a particular claim, it looks like they might have a problem," says tax expert David I. Kempler.

Even if the employees win on that point, the law isn't yet clear on whether damages for age discrimination, currently taxable, should be viewed as being similar to tax-free claims for discrimination based on sex, race, or disability. The Supreme Court hears arguments on Mar. 27 on this question. Still, even in the face of such uncertainties, these idled employees aren't backing down. "We'll go to the Supreme Court if necessary," says Aronoff. And why not? The trip would only cost each of them $600.

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