1Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue, and

all Rule references are to the Tax Court Rules of Practice and 

Procedure.

T.C. Memo. 2000-77

UNITED STATES TAX COURT

DIANA T. VISCO, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23336-97. Filed March 7, 2000. 

Diana T. Visco, pro se.

Carol-Lynn E. Moran, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: Respondent determined a deficiency of $37,114

in petitioner’s 1992 Federal income tax and an addition to tax 

pursuant to section 6651(a)(1)1 of $495.
- 2 -

The issues for decision are: (1) Whether petitioner is

required to include $138,799.18 in compensation for services,

backpay, and interest on backpay in her 1992 gross income; (2)

whether petitioner is required to include a $182 State income tax

refund and $15 of interest in her 1992 gross income; and (3)

whether petitioner is liable for an addition to tax under section

6651(a)(1) for failure to timely file her 1992 Federal income tax

return.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioner resided in

Philadelphia, Pennsylvania, at the time she filed her petition. 

Petitioner was a reading specialist for the School District

of Cheltenham Township (district) until June of 1989. In June of

1989, the district asked petitioner not to return to work the

following school year, and in August of 1989, she was suspended

from her position with the district. In November of 1989, the

district’s school board (board) voted to dismiss petitioner for

willfully violating school laws when she failed to follow

directives of superiors. Petitioner appealed the board’s

decision to dismiss her. On January 24, 1990, the secretary of

education for the Commonwealth of Pennsylvania (secretary)

reversed the board’s decision and ordered the district to
- 3 -

2This represents total compensation for services before

payroll deductions.

reinstate petitioner to the position which she had held during

the 1988-89 school year, or a comparable position, with backpay

plus interest at 6 percent per annum. The board appealed the

secretary’s order, and on June 3, 1991, the Commonwealth Court of

Pennsylvania (Commonwealth Court) affirmed the secretary’s

decision. 

The district employed petitioner from September of 1991

until June of 1992. As compensation for services provided by

petitioner during 1992, she received $38,223.86.2 Petitioner

cashed the checks representing this compensation. Petitioner did

not return to work with the district after June of 1992. 

As a result of the above proceedings regarding petitioner’s

dismissal, the district attempted to pay petitioner backpay for

the 1989-90 and 1990-91 school years. On February 25, 1992, the

district issued two checks payable to petitioner in the amounts

of $24,601.74 and $26,328.08. These checks represented

$95,189.92 in backpay and interest on backpay after payroll

deductions. However, petitioner never cashed these checks, and

they were subsequently voided by the district. On December 3,

1992, the Commonwealth Court ordered the district to pay 
- 4 -

3A portion of the payroll deductions consisted of $31,042.86

in Federal income taxes.

4However, the record is not clear whether petitioner also

received the third check for $3,195.84 on Dec. 28, 1992. It is

irrelevant to our inquiry since the check for $3,195.84 was not

included in the Form W-2, Wage and Tax Statement, for 1992 and is

not included in respondent’s determination of unreported income.

petitioner $111,708.44. The $111,708.44 amount was computed as

follows:

1989-90 salary 1$55,634.51 

1990-91 salary 252,349.93 

Additional interest 3524.58 

Reimbursement for benefits 43,195.84

 Total 5111,704.86

1This amount consists of a base salary of $50,500 less interim earnings of

$871.15, plus interest to Feb. 25, 1991, of $6,005.66. 

2This amount consists of a base salary of $54,300 less interim earnings of

$4,968, plus interest to Feb. 25, 1992, of $3,017.93. 

3There is a $12,794.52 difference between the $107,984.44 ($55,634.51 +

52,349.93) in backpay and interest on backpay that the district ultimately paid

petitioner and the $95,189.92 in backpay and interest on backpay that the district

offered her on Feb. 25, 1992. The $524.58 in additional interest represents 6

percent interest on $12,794.52. 

4This amount constitutes reimbursement for medical and dental benefits that

petitioner did not receive while terminated. 

5There is a small difference of $3.58.

The district issued two checks to petitioner, each dated

December 21, 1992, totaling $59,079.78. These checks represented

backpay and interest on backpay of $108,509.02 after payroll

deductions.3 The district also issued a check to petitioner

dated December 21, 1992, in the amount of $3,195.84 as

reimbursement for benefits petitioner had not received. A

courier presented the checks to petitioner on December 28, 1992.4
- 5 -

It is clear from the record that the two checks for backpay and

interest on backpay were delivered to petitioner on December 28,

1992. Petitioner took the checks and called the district‘s

attorney and told him she was refusing the checks. Petitioner

then returned the checks to the courier. 

The district mailed petitioner a Form W-2, Wage and Tax

Statement, showing taxable income of $138,799.18 and $35,134.61

in withholdings for Federal income tax purposes. Taxable income

was based on the following: 

13 biweekly paychecks of $2,248.46 $29,229.98

6/30/92 paycheck 18,993.88

1989-90 salary 55,634.51

1990-91 salary & additional interest 252,874.51

 Total State wages 146,732.88

Less: Payments to Pennsylvania School

 Employees Retirement System (7,933.70) 

 Total taxable wages 3138,799.18

1At the end of each school year, teachers are given a summer payoff which is a

total of four biweekly paychecks. 

2This amount consists of $52,349.93 in salary and $524.58 in additional

interest.

3The $3,195.84 reimbursement for medical and dental benefits not received

while terminated was not included in the Form W-2 for 1992.

Additionally, petitioner received a $182 State income tax refund

and $15 of interest during taxable year 1992. 

On April 15, 1993, petitioner filed a Form 4868, 

“Application for Automatic Extension of Time to File U.S.

Individual Income Tax Return”. Petitioner questioned the

accuracy of the Form W-2 that she had received from the district. 

On the basis of advice received from the Internal Revenue
- 6 -

5Wages, tips and other compensation. 

6The payroll check for $29,068.18 represented backpay and

interest on backpay of $55,634.51 after payroll deductions for

the 1989-90 school year. 

7Petitioner appears to be referring to check no. 95800, not

96800. Check no. 95800 is a payroll check for $30,011.60, which

represented backpay and interest on backpay of $52,874.51 after

payroll deductions for the 1990-91 school year. 

Service’s (IRS) Taxpayer Service, petitioner filed a Form 4852,

“Substitute for Form W-2, Wage and Tax Statement or Form 1099R,

Distributions from Pensions, Annuities, Retirement or ProfitSharing Plans, IRA’s, Insurance Contracts, etc.” Petitioner sent

the Form 4852 to the IRS’s Philadelphia Criminal Investigation

Unit in June of 1993. Petitioner did not provide details of any

wages or taxes withheld on the substitute Form W-2 because she

was uncertain as to which items of income to include in her

calculations. However, petitioner asserted on the substitute

Form W-2 that her employer’s Form W-2 does not appear to be valid

because: 

(1) Money reported as earnings may actually be monies

illegally withheld from taxpayer’s retirement fund

during the years of credited service (1963-1992); 

(2) If, money reported as earnings, constitute employer

contractual liability for wrongful discharge of

taxpayer, then amount entered is inaccurate. Employer

obligation at 6 per cent annum exceeds the amount

entered in Box 10.[5]

(3) Monies issued to taxpayer identified as payroll

checks 95799[6] and 96800[7] dated December 21, 1992 are

not constructively received because they are
- 7 -

8Neither of the paychecks nor the accompanying payment stubs

identified the payment as retirement salary. The only references

to retirement salary were explanatory notes on the payment stubs

indicating that the payroll deductions taken from petitioner’s

pay for retirement benefits are based on her retirement salary. 

9The difference between the $111,708.44 that the

Commonwealth Court ordered the district to pay petitioner on Dec.

3, 1992, and the $62,275.62 that the Commonwealth Court ordered

(continued...)

inaccurately identified as retirement[8] salary. 

Taxpayer has not filed any application for retirement

allowance. Moreover, these checks serve to validate a

grossly inaccurate retirement fund. Consequently, the

taxpayer does not know how to complete tax filing for

the 1992 tax year and kindly requests a thorough

investigation into this matter. * * *

The substitute Form W-2 was accompanied by a letter 

requesting a criminal investigation into the matter. In the

letter, petitioner stated she wished to complete her 1992 Federal

tax return in a manner that would allow her to preserve her legal

rights. 

On August 13, 1993, petitioner filed a Form 2688,

“Application for Additional Extension of Time to File U.S.

Individual Income Tax Return”. Petitioner provided the following

explanation for her request:

I requested a criminal investigation of monies reported

on my 1992 W-2. I have not received any information

about the information given on Form 4852 dated June 17,

1993 and [sic] am uncertain about how to file my 1992

tax return. 

On October 4, 1993, the Commonwealth Court ordered the

district to pay the sum of $62,275.629 into the Commonwealth
- 8 -

9(...continued)

the district to pay into the Commonwealth Court on Oct. 4, 1993,

was the result of payroll withholdings. The checks for backpay

and interest had net amounts of $29,068.18 and $30,011.60. Thus,

$29,068.18 plus $30,011.60 plus $3,195.84 (reimbursement for

medical benefits not received while terminated) equals

$62,275.62. 

Court since petitioner had refused to keep the two checks

presented to her on December 28, 1992. The district paid

$62,275.62 into the Commonwealth Court on March 10, 1994. 

On March 20, 1995, the IRS sent a Form 4598, “Form W-2, or

1099 Not Received or Incorrect”, to the district. The Form 4598

indicated that the district’s Form W-2 differed from petitioner’s

records. The district responded on the back of the same form by

indicating that petitioner’s Form W-2 was mailed to her in

January of 1993. 

On September 28, 1995, the Commonwealth Court opened a bank

account with Dauphin Deposit Bank and Trust Co. for the benefit

of petitioner. In order for petitioner to withdraw cash from the

account, all that she was required to do was to write a letter to

the Commonwealth Court requesting access to the funds. 

By letter dated October 3, 1995, the Commonwealth Court

notified petitioner that it had transferred the $62,275.62 to an

interest-bearing account in her name. On August 28, 1997,

respondent mailed a statutory notice of deficiency to petitioner

for the taxable year 1992. 
- 9 -

As of the date of trial, petitioner had not contacted the

Commonwealth Court requesting access to the $62,275.62 that the

district had deposited with Dauphin Deposit Bank and Trust Co.

for her benefit. Petitioner has never filed a Federal income tax

return for the taxable year 1992. 

OPINION

Gross Income

The first issue is whether petitioner is required to include 

$138,799.18 in compensation for services, backpay, and interest

on backpay in her 1992 gross income. Gross income includes

income from whatever source derived, including compensation for

services. See sec. 61(a)(1). 

A. Compensation for Services Performed During 1992

At trial, petitioner acknowledged that she received and

cashed paychecks for services performed in 1992. Since

compensation for services rendered is includable in gross income

and petitioner does not dispute that she received it, we hold

that petitioner is required to include $38,223.86 of wages for

services that she performed in 1992 in her 1992 gross income.

B. Backpay and Interest on Backpay

With regard to the backpay and interest on backpay,

petitioner appears to argue, in the alternative, that: She never

constructively received these amounts; the money was a damage
- 10 -

10Sec. 1.451-2(a), Income Tax Regs., defines the term 

“constructive receipt” as follows:

(a) General rule. Income although not actually reduced

to a taxpayer’s possession is constructively received

by him in the taxable year during which it is credited

to his account, set apart for him, or otherwise made

available so that he may draw upon it at any time, or

so that he could have drawn upon it during the taxable

year if notice of intention to withdraw had been given.

However, income is not constructively received if the

taxpayer’s control of its receipt is subject to

substantial limitations or restrictions. * * *

award in a tortlike action and not backpay; and the income is an

unauthorized withdrawal from her pension plan. 

The amount of any item of gross income shall be included in

the taxable year in which it is actually or constructively10

received by the taxpayer. See sec. 451(a); sec. 1.451-1(a),

Income Tax Regs. Amounts owed to cash basis taxpayers are not to

be included in the taxpayers’ income unless it appears that the

money was available to them, the payor was able and ready to pay

them, their right to receive the money was not restricted, and

their failure to receive the cash resulted from the exercise of

their own choice. See Basila v. Commissioner, 36 T.C. 111,

115-116 (1961).

The district made two attempts to pay petitioner for the

backpay and interest on backpay during 1992. Checks were

initially issued to petitioner in February of 1992 and

subsequently voided by the district because petitioner did not
- 11 -

11“A check in the hands of a taxpayer ordinarily means that

the funds are immediately available.” Walter v. United States,

148 F.3d 1027, 1029 (8th Cir. 1998). 

cash the checks. The district made another attempt to pay

petitioner in December of 1992. This time, petitioner took the

checks and called the district’s attorney and told him she was

refusing the checks. Petitioner then returned the checks to the

courier. We conclude that the money was available11 to

petitioner, and the district was able and willing to pay her.

Nevertheless, petitioner characterized the district’s

attempt to deliver the checks as a settlement offer, which she

rejected. We disagree. Before delivering the checks, the

Commonwealth Court established the exact amount due petitioner

for backpay, interest on backpay, and benefits. The district was

not negotiating; it was complying with the Commonwealth Court’s

December 3, 1992, order. Consequently, when the courier

delivered the checks to petitioner on December 28, 1992, she had

the right to a specific amount of money and the power to receive

that money. 

Petitioner argues that a substantial restriction existed on

the money when the Commonwealth Court deposited the funds with

Dauphin Deposit Bank and Trust Co. for her benefit. However,

that account was established for petitioner’s benefit in 1995,

and our inquiry turns on whether a substantial restriction
- 12 -

12Petitioner had $31,042.86 in Federal income taxes withheld

from the two checks issued to her for backpay and interest on

backpay. Assuming arguendo that petitioner was correct and that

she did not constructively receive the checks for backpay and

interest on backpay in 1992, petitioner would have overpaid her

1992 Federal income taxes. 

The Tax Court has jurisdiction to award to a taxpayer a

refund of overpaid taxes if the Commissioner issued the notice of

deficiency within the later of 2 years after the tax was paid or

3 years after the return was filed. See secs. 6511(b)(2)(A) and

(B) and 6512(b)(3)(B); Commissioner v. Lundy, 516 U.S. 235,

241-242 (1996). The 2-year period applies (and the 3-year period

does not) if the taxpayer did not file his or her income tax

return before the Commissioner issued a notice of deficiency for

that year. See secs. 6511(b)(2)(B) and 6512(b)(3); Commissioner

v. Lundy, supra at 243. Petitioner did not file a tax return for

1992. 

Respondent mailed the notice of deficiency on Aug. 28, 1997. 

We may order a refund of any overpayments petitioner made within

the 2 years preceding Aug. 28, 1997. Petitioner’s payments of

taxes for 1992 were made by the district through withholding. 

(continued...)

existed in 1992. When the checks were delivered to petitioner in

December of 1992, they were payable only to petitioner, and none

of the documents and orders involved in the various proceedings

contained any indication of any condition or limitation imposed

upon petitioner’s receipt of the checks. Petitioner had

unfettered control over the checks in 1992 but returned them. 

Thus, the money was not restricted, and petitioner’s failure to

benefit from the amounts represented by the checks resulted from

the exercise of her own choice. Therefore, we conclude that

petitioner constructively received the backpay and interest on

backpay in 1992.12
- 13 -

12(...continued)

Withheld income taxes are deemed paid on Apr. 15 of the year

following the taxable year. See sec. 6513(b)(1); Baral v. United

States, U.S. , 68 U.S.L.W. 4119 (Feb. 22, 2000). Thus,

petitioner is deemed to have paid income tax for 1992 on Apr. 15,

1993, which is more than 2 years before Aug. 28, 1997.

If petitioner did not constructively receive the income for

backpay and interest on backpay in 1992, then she would have

overpaid her 1992 taxes but would be time barred to claim credit

for any overpayment. Furthermore, when petitioner actually or

constructively receives the $62,275.62 plus interest from the

interest-bearing account with Dauphin Deposit Bank and Trust Co.,

she will presumably have received taxable income, owe tax on that

income, and might be unable to get any credit for the taxes

previously paid.

13Petitioner seems to be arguing that the backpay was really

a damage award and thus under sec. 104(a) is excluded from gross

income. 

14The Small Business Job Protection Act of 1996, Pub. L.

104-188, sec. 1605(a), 110 Stat. 1838, amended sec. 104(a)(2) to

limit the exclusion, inter alia, to “personal physical injuries

or physical sickness.” The amendment does not apply to damages

collected before the date of its enactment and has no bearing

here.

Petitioner’s next argument is that “The totality of the

circumstances in this matter points to the nature of the action

as a tortlike action and the nature of the money as damages13 and

not backpay.” We disagree.

Gross income does not include the amount of any damages

received on account of personal injuries or sickness. See sec.

104(a)(2).14 “The term ‘damages received (whether by suit or

agreement)’ means an amount received * * * through prosecution of

a legal suit or action based upon tort or tort type rights, or
- 14 -

through a settlement agreement entered into in lieu of such

prosecution.” Sec. 1.104-1(c), Income Tax Regs. In order for

damages to be excludable from gross income under section

104(a)(2), the taxpayer must demonstrate that: (1) The

underlying cause of action is based upon tort or tort type

rights, and (2) the damages were received on account of personal

injuries or sickness. See Commissioner v. Schleier, 515 U.S.

323, 337 (1995). 

The record in this case shows that petitioner’s dispute with

the district was over her dismissal for failure to comply with

the directives of her superiors. There is nothing in this record

that would indicate that the dispute involved a tortlike action

or a personal injury. As stated in the opinion of the secretary

of education: 

The District’s dismissal action is based upon a

conclusion that Visco persistently and willfully

violated the school laws when she failed to comply with

requests made by the Principal, Assistant

Superintendent and Superintendent. As correctly

pointed out by Visco, the District’s action involves

three elements, all of which must be satisfied in order

for us to uphold the District’s action. The district

has the burden of proving by substantial evidence that

Visco’s actions were 1) persistent; 2) willful; and 3)

violations of school law. “Substantial evidence has

been defined as such relevant evidence as a reasonable

mind might accept as adequate to support a conclusion.”

* * * 

Recovery of backpay in this context does not fall within the

exclusion of section 104(a)(2) because it does not satisfy the
- 15 -

critical element of being “on account of personal injury or

sickness.” Commissioner v. Schleier, supra at 330. In the

instant case, the record is clear that the payments made to

petitioner were for backpay and interest on backpay. We conclude

that the income from backpay and interest on backpay does not

fall within the exclusion from income set forth in section

104(a)(2).

Petitioner’s final argument is that the money received from

the district was an unauthorized withdrawal from her pension. 

Petitioner bears the burden of proof. See Rule 142(a). Other

than petitioner’s testimony that she was concerned that the

payment for backpay offered by the district could have been an

unauthorized withdrawal from her retirement fund, she offered no

proof that the money was withdrawn from the Pennsylvania School

Employees Retirement System. All of the other evidence supports

a conclusion that none of the amounts in issue constituted

withdrawals from petitioner’s retirement fund. In fact,

petitioner’s 1992 Form W-2 reflects $7,933.70 in contributions by

her to the pension plan during the year. Thus, we conclude that

petitioner’s assertion lacks merit.

C. State Income Tax Refund and Interest Income

Petitioner stipulated that she received a $182 State income

tax refund in 1992 that she had claimed as a deduction in prior

years. Petitioner offered no evidence that respondent’s
- 16 -

determination is in error. Petitioner also stipulated that she

received $15 of interest in 1992. We sustain respondent’s

determination regarding these items.

Section 6651(a)(1) Addition to Tax

The final issue is whether petitioner is liable for the

addition to tax under section 6651(a)(1) for 1992. Petitioner

contends that she did not have enough information to file a

return because she could not verify that part of the income

reflected on her 1992 Form W-2 represented backpay and interest

on the backpay rather than an unauthorized withdrawal from her

retirement fund. 

It is well settled that in order to avoid the addition to

tax prescribed by section 6651(a), petitioner bears the burden of

proving both (1) that the failure did not result from “willful

neglect,” and (2) that the failure was “due to reasonable cause.”

Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241, 245

(1985). “Willful neglect” denotes “a conscious, intentional

failure or reckless indifference.” United States v. Boyle, supra

at 245. “Reasonable cause” correlates to “ordinary business care

and prudence”. Id. at 246 n.4; sec. 301.6651-1(c)(1), Proced. &

Admin. Regs.

Petitioner was aware of her need to file a return but

questioned the information on the Form W-2 that she received from

the district. Petitioner contacted the district but was unable
- 17 -

to satisfy her concerns. Petitioner contacted the IRS and on the

basis of the advice of the IRS’s Taxpayer Service, timely filed a

Form 4868, “Application for Automatic Extension of Time To File

U.S. Individual Income Tax return” for 1992. Petitioner again

attempted to obtain information from the district but was not

satisfied. Petitioner contacted the IRS again and was advised to

contact the IRS’s Criminal Investigation Unit and to file a Form

4852, “Substitute for Form W-2, Wage and Tax Statement or Form

1099R, Distributions from Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRA’s, Insurance Contracts, etc.” 

When petitioner contacted the Service’s Criminal

Investigation Unit, she indicated that she wanted to complete her

1992 Federal tax return in a manner that would allow her to

preserve her rights but that she did not know how to complete her

tax filing for 1992. Petitioner requested an investigation into

the matter. 

In August of 1993, petitioner filed a Form 2688,

“Application for Additional Extension of Time To File U.S.

Individual Income Tax Return” and notified the IRS that she still

had not received the information that she previously requested. 

As a result, petitioner asserted that she did not know how to

file her return. 

The IRS sent Form 4598, “Form W-2, or 1099 Not Received or

Incorrect”, to the district indicating that petitioner’s records
- 18 -

differed from the district’s. That letter was sent nearly 2

years after petitioner had advised the IRS of her concerns when

she filed Form 2688 for an additional extension of time to file

her 1992 tax return. The district’s response to the IRS

indicated only that the district mailed petitioner a Form W-2 in

January of 1993. 

Petitioner had $35,134.61 in Federal income taxes withheld

from her paychecks in 1992. Respondent’s notice of deficiency

indicates that petitioner’s correct tax liability is $37,114. As

of the date of trial, petitioner had not contacted the

Commonwealth Court requesting access to the $62,275.62 that the

district deposited with Dauphin Deposit Bank and Trust Co. for

her benefit. In other words, 95 percent of petitioner’s Federal

tax liability as determined by respondent was paid in 1992, and

as of 1999, she still had not requested access to the funds

deposited on her behalf for backpay and interest on backpay

because of her confusion about the nature of these funds. We

think petitioner was sincere in her confusion about the nature of

the backpay that had been awarded to her. While petitioner was

mistaken about the nature of the backpay, she subjectively

believed that her concerns were real, she was forthcoming with

the IRS about her confusion and she asked for assistance, and she

did the best that she was personally capable of doing to comply

with the law. 
- 19 -

Consequently, we do not sustain respondent’s determination

that petitioner is liable for an addition to tax pursuant to

section 6651(a)(1).

Decision will be entered for

respondent with respect to the 

deficiency and for petitioner with

respect to the addition to tax

under section 6651(a)(1).