United States Tax Court

T.C. Memo. 2022-111

BRYANT D. TILLMAN-KELLY AND MELANIE TILLMAN-KELLY,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 6127-20. Filed November 21, 2022.

—————

Bryant D. Tillman-Kelly and Melanie Tillman-Kelly, pro se.

Monica I. Cendejas, for respondent.

MEMORANDUM OPINION

URDA, Judge: Petitioners, Bryant and Melanie Tillman-Kelly, 

challenge the Internal Revenue Service’s (IRS) determination of a 

deficiency of $67,322 in their 2017 federal income tax.1 Mr. TillmanKelly received $230,671 to settle an Illinois state court action against 

Chicago State University (CSU), its board of trustees, and Dr. Justin 

Akujieze (Defendants) in 2017. Mr. Tillman-Kelly alleged that the 

Defendants had retaliated against him for reporting the misuse of grant 

funds, resulting in “emotional distress, humiliation, and lost income.” 

The sole remaining question (in the wake of a stipulation of settled 

issues) is whether the settlement proceeds should be excluded from the 

Tillman-Kellys’ gross income under section 104(a)(2), which shields

damages received “on account of personal physical injuries or physical 

1 Unless otherwise indicated, all statutory references are to the Internal 

Revenue Code, Title 26 U.S.C. or I.R.C., in effect at all relevant times, all regulation 

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all 

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

Procedure. All amounts are rounded to the nearest dollar.

Served 11/21/22
2

[*2] sickness” from inclusion in gross income. We conclude that the 

settlement proceeds do not qualify for this exclusion and will sustain the 

deficiency determination, subject to certain concessions made by the 

Commissioner.

Background

The parties have moved to submit this case for decision without 

trial under Rule 122. All facts relevant to this case have been stipulated 

or otherwise included in the record. See Rule 122(a). The TillmanKellys lived in California when they timely filed their petition.

I. Mr. Tillman-Kelly’s Lawsuit

In September 2009 CSU hired Mr. Tillman-Kelly as project 

director of a federal grant that CSU had received. Mr. Tillman-Kelly 

reported directly to Dr. Akujieze, a dean at CSU, and Robert Warner, 

the dean’s executive assistant. A few months into his employment Mr. 

Tillman-Kelly expressed concerns to the U.S. Department of Education 

and CSU’s Ethics Office that certain grant funds were being 

misappropriated. On June 17, 2010, CSU terminated Mr. TillmanKelly’s employment.

Mr. Tillman-Kelly thereafter filed suit against the Defendants in 

Illinois state court, alleging that they retaliated against him for his 

complaints of misuse of funds.2 He stated that he “was subjected to 

humiliation, isolation, harsher discipline and different and 

comparatively more negative terms and standards of employment,

[than] other university employees, denial of benefits, demotions, and 

ultimately, termination.” Specifically, Mr. Tillman-Kelly asserted that 

Dr. Akujieze threatened to “do what he had to do” in response to Mr. 

Tillman-Kelly’s ethics complaints, which (again, according to the 

complaint) consisted primarily of eliminating Mr. Tillman-Kelly’s job 

responsibilities culminating with his termination.

Mr. Tillman-Kelly contended that these actions violated Illinois 

state whistleblower protections and sought “damages included but not 

limited to emotional distress and humiliation and lost income and 

2 Mr. Tillman-Kelly originally had filed suit against CSU and its board of 

trustees in the U.S. District Court for the Northern District of Illinois, but he moved 

to dismiss that action a few months later. 
3

[*3] benefits.” His complaint did not allege that he suffered any physical 

injuries, nor did he seek compensation for physical injuries.

Mr. Tillman-Kelly and the Defendants settled the state court case 

in 2017. Under the terms of the settlement agreement, Mr. TillmanKelly received a payment of $230,671 in exchange for ending his suit. 

The settlement agreement described this payment as being for “alleged 

non-wage injuries, as non-economic emotional distress damages.”

II. IRS Examination and Notice of Deficiency

Although the Tillman-Kellys did not include the settlement

payment on their 2017 federal income tax return, CSU reported it to the 

IRS on Form 1099-MISC, Miscellaneous Income. The IRS later issued 

a notice of deficiency to the Tillman-Kellys, determining a deficiency of 

$67,322 and an accuracy-related penalty of $13,423.3 As most relevant 

here, the notice adjusted the Tillman-Kellys’ gross income to reflect 

receipt of the CSU settlement payment.

Discussion

I. Burden of Proof

The Commissioner’s determinations in a notice of deficiency are 

generally presumed correct, and the taxpayer bears the burden of 

proving those determinations erroneous. See Rule 142(a)(1); Welch v. 

Helvering, 290 U.S. 111, 115 (1933); Merkel v. Commissioner, 192 F.3d 

844, 852 (9th Cir. 1999), aff’g 109 T.C. 463 (1997). The U.S. Court of 

Appeals for the Ninth Circuit, to which an appeal in this case would 

ordinarily lie, see I.R.C. § 7482(b)(1)(A), has held that that the 

Commissioner must establish “some evidentiary foundation” linking the 

taxpayer to an alleged income-producing activity before the 

presumption of correctness attaches to the deficiency determination, 

Weimerskirch v. Commissioner, 596 F.2d 358, 361–62 (9th Cir. 1979),

rev’g 67 T.C. 672 (1977). Once the Commissioner has established such 

a foundation, the burden of proof shifts to the taxpayer to prove by a 

preponderance of the evidence that the Commissioner’s determinations 

3 The deficiency determined in the notice reflected several other adjustments 

to the Tillman-Kellys’ income, but those adjustments are not in dispute. We further 

note that the Commissioner has conceded the accuracy-related penalty determined in 

the notice.
4

[*4] are arbitrary or erroneous. See Hardy v. Commissioner, 181 F.3d 

1002, 1004–05 (9th Cir. 1999), aff’g T.C. Memo. 1997-97.

The Tillman-Kellys have stipulated that they received the 

settlement proceeds at issue, and the Commissioner has established an 

evidentiary foundation linking them to the unreported income. The 

Commissioner’s determination is accordingly presumed correct, and the 

Tillman-Kellys have the burden of proving that the determination is 

erroneous. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. at 115.4

II. Analysis

A. Legal Background

Gross income includes all income from whatever source derived. 

See I.R.C. § 61(a); see also Commissioner v. Glenshaw Glass Co., 348 

U.S. 426, 429 (1955); Helvering v. Clifford, 309 U.S. 331, 334 (1940). 

Exclusions from gross income “must be narrowly construed.” 

Commissioner v. Schleier, 515 U.S. 323, 328 (1995) (quoting United 

States v. Burke, 504 U.S. 229, 248 (1992) (Souter, J., concurring in the

judgment)).

Settlement proceeds constitute gross income unless the taxpayer 

proves that such proceeds fall within a specific statutory exception. See 

id.; Save v. Commissioner, T.C. Memo. 2009-209, 2009 WL 2950838, 

at *1. Section 104(a)(2) supplies one such exception, excluding from 

gross income “any damages (other than punitive damages) received 

(whether by suit or agreement . . . ) on account of personal physical 

injuries or physical sickness.”

For the purposes of this exception, “emotional distress shall not 

be treated as a physical injury or physical sickness.” I.R.C. § 104(a) 

(flush text).5 Treasury Regulation § 1.104-1(c)(1) further explains that 

“[e]motional distress is not considered a physical injury or physical 

sickness” unless it is “attributable to a physical injury or physical 

sickness.” See Rivera v. Baker W., Inc., 430 F.3d 1253, 1256 (9th 

4 We note that Mr. Tillman-Kelly did not seek a shift in the burden of proof 

under section 7491(a) and that the submission of a case under Rule 122(a) does not 

shift the burden of proof. See Rule 122(b).

5 The flush text of section 104(a) provides that the general rule against

exclusion of emotional-distress damages does not apply to “the amount paid for medical 

care” attributable to emotional distress. The Tillman-Kellys neither raised this issue 

nor introduced evidence regarding amounts for any medical care.
5

[*5] Cir. 2005) (“[O]nly damages for physical injuries or sickness, and 

not damages for emotional distress, [are] excluded from . . . income.”); 

see also Barbato v. Commissioner, T.C. Memo. 2016-23, at *7–9 (finding 

that damages for emotional distress attributable to workplace 

discrimination and not a physical injury or physical sickness do not fall 

within the exclusion from income granted by section 104(a)(2)); Hawkins 

v. Commissioner, T.C. Memo. 2007-286, 2007 WL 2736219, at *2 (“In 

this context, the terms ‘physical injury’ and ‘physical sickness’ do not 

include emotional distress . . . .”), aff’d, 386 F. App’x 697 (9th Cir. 2010).

“For a taxpayer to fall within [the section 104(a)(2)] exclusion, he 

must show that there is ‘a direct causal link between the damages and 

the personal injuries sustained.’” Doyle v. Commissioner, T.C. 

Memo. 2019-8, at *11 (quoting Rivera, 430 F.3d at 1257); see also Blum 

v. Commissioner, T.C. Memo. 2021-18, at *7, aff’d, No. 21-71113, 2022

WL 1797334 (9th Cir. June 2, 2022). When a taxpayer receives damages 

pursuant to a settlement agreement, the nature of the claim that was 

the actual basis for the settlement controls whether the damages are 

excludable under section 104(a)(2). See Burke, 504 U.S. at 237; see also 

Bagley v. Commissioner, 105 T.C. 396, 406 (1995) (“[T]he critical 

question is, in lieu of what was the settlement amount paid[?]”), aff’d, 

121 F.3d 393 (8th Cir. 1997); Blum, T.C. Memo. 2021-18, at *8; Smith v. 

Commissioner, T.C. Memo. 2018-127, at *18, aff’d without published 

opinion, No. 19-1050, 2020 WL 8368297 (D.C. Cir. 2020).

The nature of the claim is typically determined by looking to “the 

underlying agreement to determine whether it expressly states that the 

damages compensate for ‘personal physical injuries or physical sickness’ 

under § 104(a)(2).” Rivera, 430 F.3d at 1257; see also Ghadiri-Asli v. 

Commissioner, T.C. Memo. 2019-142, at *38, aff’d sub nom. NajleRahim v. Commissioner, No. 20-72031, 2022 WL 2869776 (9th Cir. 

July 21, 2022). Should an agreement fail to answer the question, we 

inquire as to “the intent of the payor.” Devine v. Commissioner, T.C. 

Memo. 2017-111, at *11 (quoting Longoria v. Commissioner, T.C. Memo. 

2009-162, 2009 WL 1905040, at *7); see also Rivera, 430 F.3d at 1257; 

Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), aff’g T.C. 

Memo. 1964-33; Ahmed v. Commissioner, T.C. Memo. 2011-295, 2011 

WL 6440130, at *3, aff’d, 498 F. App’x 919 (11th Cir. 2012).

The payor’s intent may be discerned by taking into account “all 

the facts and circumstances of the case,” including the amount paid, the 

allegations in the injured party’s complaint, and the factual 

circumstances that led to the agreement. Rivera, 430 F.3d at 1257
6

[*6] (quoting Allum v. Commissioner, T.C. Memo. 2005-177, 2005 WL 

1692488, at *4, aff’d, 231 F. App’x 550 (9th Cir. 2007)); see Green v. 

Commissioner, 507 F.3d 857, 868 (5th Cir. 2007), aff’g T.C. Memo. 2005-

250; see also Bent v. Commissioner, 87 T.C. 236, 245 (1986), aff’d, 835 

F.2d 67 (3d Cir. 1987). “Ultimately, the character of the payment hinges 

on the payor’s dominant reason for making the payment.” Green, 507 

F.3d at 868. “[T]he nature of underlying claims cannot be determined 

from a general release [of claims] that is broad and inclusive.” Ahmed

v. Commissioner, 2011 WL 6440130, at *3.

B. Mr. Tillman-Kelly’s Settlement Payment

The settlement agreement establishes that the payment is not 

excludable under section 104(a)(2). The parties expressly agreed that 

the $230,671 payment to Mr. Tillman-Kelly was for “non-wage injuries, 

as non-economic emotional distress damages.” The parties do not 

reference physical injuries or sickness in the agreement, much less tie 

the settlement payment to any such physical injuries or sickness.

The Tillman-Kellys respond that the retaliation claim was 

actually rooted in a heated altercation between Mr. Tillman-Kelly and

Mr. Warner, which resulted in physical injury from the slamming of a 

door, and that the settlement proceeds were meant to compensate Mr. 

Tillman-Kelly for that injury. The Tillman-Kellys assert that their 

treatment of the proceeds was thus consistent with IRS 

Publication 4345, which states in relevant part that “proceeds you 

receive for emotional distress or mental anguish attributable to a 

personal physical injury or physical sickness are treated the same as 

proceeds received for Personal physical injuries or physical sickness.” 

I.R.S. Publication 4345 (Revised Nov. 2022), Settlements—Taxability,

at 1.

The settlement agreement belies the Tillman-Kellys’ position. In 

that agreement, the parties characterized the payment as one for

“emotional distress damages” and did not reference any physical injury 

whatsoever.

Even if we were to expand our focus beyond the settlement 

agreement, the Tillman-Kellys would fare no better. As an initial 

matter, Mr. Tillman-Kelly’s claim against the Defendants does not 

relate to compensation for physical injuries. The state court claim 

alleges violation of an Illinois whistleblower statute, describing a 

retaliatory campaign involving improper removal of job responsibilities 
7

[*7] and ultimately termination, not physical injury. Nor did Mr. 

Tillman-Kelly’s complaint seek damages for physical injury, instead 

pursuing damages for “emotional distress and humiliation and lost 

income and benefits.”

The only clear reference in the record to any physical injury comes

in Mr. Tillman-Kelly’s responses to interrogatories in the state court 

action.6 In the context of a lengthy description of the events at issue and 

his complaints, Mr. Tillman-Kelly stated he reported to CSU ethics 

officials an incident in which Mr. Warner “slammed a door on [him]

injuring [him].” Mr. Tillman-Kelly, however, did not identify this 

purported injury in response to an interrogatory asking for “the basis 

for any damages you claim to be entitled to, including the compensatory 

and punitive damages articulated in your Prayer for Relief.” Nor does 

the record explain the precise nature or extent of Mr. Tillman-Kelly’s 

purported physical injury from the door.

In short, we return to the plain text of the settlement agreement 

that the payment was made for “alleged non-wage injuries, as noneconomic emotional distress damages.” This text is clear on its face, but

even if there were some doubt, the nature of the state court litigation 

supports the conclusion that the dominant reason for the payment was 

to compensate for emotional distress and was altogether unrelated to 

physical injury.

III. Conclusion

In sum, we hold that the settlement payment is not excludable 

from Mr. Tillman-Kelly’s gross income under section 104(a)(2) for tax 

year 2017. We accordingly sustain the IRS’s deficiency determination, 

subject to the Commissioner’s concessions.

To reflect the foregoing, 

Decision will be entered for respondent as to the deficiency and 

for petitioners as to the accuracy-related penalty under section 6662(a).

6 We note that during his deposition in the state court litigation, Mr. TillmanKelly referenced a hospital visit in August 2010 in response to panic attacks. 

According to Mr. Tillman-Kelly’s own testimony, however, the hospital sent him home 

because “physically nothing was wrong with [him].”