FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

GAVIN POLONE, 

No. 04-72672 Petitioner,

Tax Ct. No.

v.  12665-00

COMMISSIONER OF INTERNAL ORDER AND REVENUE,

OPINION Respondent. 

Appeal from a Decision of the

United States Tax Court

Argued and Submitted

April 6, 2006—Pasadena, California

Filed October 11, 2007

Before: Jerome Farris and Sidney R. Thomas, Circuit Judges,

and George Schiavelli,* District Judge.

Opinion by Judge Thomas

*The Honorable George Schiavelli, United States District Judge for the

Central District of California, sitting by designation. 

13781
COUNSEL

James M. Harris, Edwin L. Norris, Jonathan M. Brenner, Sidley Austin Brown & Wood LLP, for appellant Gavin Polone.

Bridget M. Rowan, Kenneth L. Greene, Eileen J. O’Connor,

United States Department of Justice, for appellee Commissioner of the Internal Revenue Service. 

ORDER

The opinion filed March 12, 2007, is withdrawn and a substituted opinion is filed concurrently with this order. 

With the filing of the opinion, the panel has voted to deny

the petition for rehearing. Judge Thomas voted to reject the

suggestion for rehearing en banc and Judges Farris and Schiavelli so recommend. 

The full court has been advised of the suggestion for

rehearing en banc, and no judge of the court has requested a

vote on the suggestion for rehearing en banc. Fed. R. App. P.

35(b). 

The petition for rehearing is denied and the suggestion for

rehearing en banc is rejected. 

No further petitions for rehearing or petitions for rehearing

en banc shall be filed or entertained in this case. 

13784 POLONE v. COMMISSIONER OF INTERNAL REVENUE
The motion to modify opinion is denied as moot. 

OPINION

THOMAS, Circuit Judge: 

This appeal presents the question of whether payments

received after the effective date of amendments to 26 U.S.C.

§ 104(a)(2) based on a defamation settlement agreement executed prior to the effective date can be excluded from gross

income. We conclude that the amendments apply to payments

received after the effective date of the amendment, and we

affirm the judgment of the Tax Court. 

I

Gavin Polone worked as a talent agent at United Talent

Agency (“UTA”) from 1989 until April 21, 1996, when he

was fired. After terminating Polone, UTA spoke with various

entertainment industry trade publications, and made statements about Polone’s termination. Specifically, UTA alleged

that Polone was terminated for “inappropriate behavior.” 

Polone hired counsel, and sent UTA a demand letter on

April 22, 1996. The letter alleged that UTA had made defamatory statements about Polone, and requested that UTA “cease

and desist from making further defamatory statements.” On

April 24, 1996, Polone filed a complaint in the Los Angeles

County Superior Court alleging, among other things, wrongful termination and defamation. Polone and UTA settled both

claims on May 3, 1996. 

Polone received $2 million as settlement of the wrongful

termination claim, which is not at issue in this case. As part

of the settlement of the defamation claim, UTA issued a press

release retracting its previous statements about Polone’s terPOLONE v. COMMISSIONER OF INTERNAL REVENUE 13785
mination, and paid Polone $4 million. The $4 million was

paid in four installments of $1 million, which Polone received

on May 3, 1996; November 11, 1996; May 5, 1997; and

November 11, 1998. 

Polone, a cash basis taxpayer, did not include the May 1996

payment on his 1996 federal income tax return. He included

the November 1996 payment, but later filed an amended 1996

return seeking a refund. He did not pay taxes on the May

1997 or November 1998 payments. Polone justified his failure

to pay taxes on this income on our decision in Warren Jones

Co. v. Comm’r, 524 F.2d 788 (9th Cir. 1975), alleging that

Warren Jones Co. required him “to treat his receipt of his former employer’s promise to pay $4 million as an amount realized in the 1996 taxable year at the time of his receipt of the

promise to pay.” 

In September 2000, the IRS sent Polone a deficiency notice

for his failure to pay taxes on the settlement payments he

received in May 1996, May 1997, and November 1998.

Polone petitioned for review in the Tax Court in December

2000. He also filed an amended petition in August 2002,

claiming that the IRS should have reduced his 1996 taxable

income by $1 million because he had erroneously paid taxes

on the November 1996 settlement payment. The Tax Court

held that Polone owed taxes on the May 1997 and November

1998 settlement payments, and that the taxes he paid on the

November 1996 settlement payment were proper. Polone v.

Comm’r, T.C. Memo 2003-339 (2003). The Tax Court also

held that Polone did not owe any taxes on the May 1996 settlement payment. Id. He appeals. 

II

[1] Section 61(a) of the Tax Code defines “gross income”

as “all income from whatever source derived.” 26 U.S.C.

§ 61(a). Thus, subject to certain exemptions, which are to be

construed narrowly, § 61(a) applies to all income, including

13786 POLONE v. COMMISSIONER OF INTERNAL REVENUE
settlement payments. Comm’r v. Schleier, 515 U.S. 323, 328

(1995) (“the default rule of statutory interpretation [is] that

exclusions from income must be narrowly construed.” (quotations omitted)); Comm’r v. Glenshaw Glass, 348 U.S. 426,

431 (1955) (“The mere fact that payments were extracted

from the wrongdoers as punishment for unlawful conduct can

not detract from their character as taxable income to the recipients.”). 

In May 1996, when Polone and UTA settled, 26 U.S.C.

§ 104 exempted “the amount of any damages received

(whether by suit or agreement and whether as lump sums or

as periodic payments) on account of personal injuries or sickness” from a taxpayer’s gross income. 26 U.S.C. § 104(a)(2)

(1995). The term “personal injuries” in § 104 had been interpreted to include damages from settlements of defamation

claims. Roemer v. Comm’r, 716 F.2d 693, 700 (9th Cir.

1983). 

[2] Congress amended § 104 in August 1996 so that it

exempted “the amount of any damages (other than punitive

damages) received (whether by suit or agreement and whether

as lump sums or periodic payments) on account of personal

physical injuries or physical sickness.” 26 U.S.C. § 104(a)(1)

(1996) (emphasis added). The amendment legislatively overruled court decisions, like Roemer, that had exempted awards

for nonphysical injuries from a taxpayer’s gross income. See

H.R. Conf. Rep. 104-737 at 301 (“Thus, the exclusion from

gross income does not apply to any damages received . . .

based on a claim of . . . injury to reputation.”). The effective

date of the amendments was August 20, 1996, but there was

an exception to the amendment for “amount[s] received under

a written binding agreement, court decree, or mediation award

in effect on (or issued before) September 13, 1995.” 26

U.S.C. § 104, Application of August 20, 1996 Amendments.

Here, the Tax Court held that pre-amendment § 104 applied

to Polone’s May 1996 payment from UTA, but that postPOLONE v. COMMISSIONER OF INTERNAL REVENUE 13787
amendment § 104 applied to the November 1996, May 1997,

and November 1998 payments because Polone received those

payments after the amendment’s effective date. Polone, T.C.

Memo 2003-339 at 66. As a result, it held that the May 1996

payment was tax exempt, but that the other payments were

not. Id. at 68. Polone argues that the pre-amendment § 104

applies to all four settlement payments he received, and thus

that the $4 million in its entirety is tax exempt. Whether the

May 1996 version of § 104 or the amended version of § 104

governs the settlement payments that Polone received after

the amendment’s effective date is a question of statutory

interpretation that we review de novo. Leslie v. Comm’r, 146

F.3d 643, 648 (9th Cir. 1998). 

[3] Applying the plain language of § 104, the Tax Court

properly held that the November 1996, May 1997, and

November 1998 payments were taxable. The amended statute

applies to any damages received after its effective date of

August 20, 1996, unless the parties had contracted prior to

September 13, 1995. P.L. 104-188, Title I, Subtitle F, Part 1,

§ 1605(d).1 Although Polone settled his claims with UTA in

May 1996, he did not actually receive the three payments in

question until well after the effective date of the amendments

to § 104. Because the settlement was not in effect before September 13, 1995, it was not subject to the exception to

amended § 104 for preexisting settlement agreements. Thus,

the amended version of § 104 applies to the payments Polone

received in November 1996, May 1997, and November 1998,

and the Tax Court properly sustained the IRS’s deficiency

notice. 

III

Polone, citing our decision in Warren Jones Co., argues

that under 26 U.S.C. § 1001, which explains how to calculate

1September 13, 1995 was the date upon which Congress first proposed

to amend § 104. H.R. 2491 (104th Cong., 1995). 

13788 POLONE v. COMMISSIONER OF INTERNAL REVENUE
taxable gain from the “sale or other disposition of property,”

his entire settlement of $4 million was realized on May 3,

1996, the date of settlement, even though UTA paid him in

installments. Therefore, he argues, pre-amendment § 104

applies to the entire $4 million he received from UTA. The

application of § 1001 to Polone’s settlement with UTA is a

question of statutory interpretation that we review de novo.

Leslie, 146 F.3d at 648. 

[4] A straightforward reading of § 104 — and a broader

inquiry into the system of taxation under this section — counsels against Polone’s novel proposal to import § 1001 to the

structured settlement context. Section 1001 provides that the

“gain from the sale or other disposition of property shall be

the excess of the amount realized therefrom over the adjusted

basis.” 26 U.S.C. § 1001(a). It is true that, as a general matter,

a legal claim can be considered property for purposes of

§ 1001. See, e.g., United States v. Stonehill, 83 F.3d 1156,

1159 (9th Cir. 1996). But § 104 specifically refers to

“amounts received,” and not “amounts realized” — a critical

distinction in deciding whether to treat structured settlements

as dispositions of property. 26 U.S.C. § 104. Indeed, we have

yet to find a case has treated structured settlements taxed

under § 104 as dispositions of property and not as ordinary

income received. The cases cited by Polone for this proposition are plainly inapposite. See Herbert’s Estate v. Comm’r,

138 F.2d 756 (3d Cir. 1943) (satisfaction of debt by debtor

considered a “disposition”; however, taxed year received, not

year obligation created); United States v. Davis, 370 U.S. 65

(1962) (transfer of property in compliance with divorce settlement agreement treated as a disposition of property, rendering

the transaction a taxable event); Cook v. United States, 904

F.2d 107 (1st Cir. 1990) (same); Reynolds v. Comm’r, 77

T.C.M. 1479 (1999) (same). These divorce settlements determined that divorce transactions were taxable events in the

first instance; the cases were later legislatively overruled by

enactment of section 1041 of the Internal Revenue Code, 26

U.S.C. § 1041. Cook, 904 F.2d at 109 n.1. Such holdings are

POLONE v. COMMISSIONER OF INTERNAL REVENUE 13789
irrelevant to structured settlements taxed under § 104, which

clearly contemplates that payments be taxed the year in which

they are received. 

[5] Warren Jones Co. does require a taxpayer to report the

amount realized the year property is disposed of under

§ 1001; however, for the reasons just explained, there is no

reason to apply § 1001 to personal injury settlements in the

first place. We should also note that decisions of the Tax

Court support this conclusion. See, e.g., Alexander v.

Comm’r, 69 T.C.M. (CCH) 1792 (1995); Nahey v. Comm’r,

111 T.C. 256 (1998). 

[6] Were we to adopt Polone’s interpretation of the tax

code, payees of structured settlements would be forced to pay

taxes on the full prospective amount of the settlement on the

date of the settlement, sometimes years before receiving that

amount. This would subvert congressional policy to encourage structured settlement as opposed to lump-sum schemes.

See Staff of Joint Comm. on Taxation, 106th Cong., Tax

Treatment of Structured Settlement Arrangements (Comm.

Print 1999) (available at http://www.house.gov/jct/x-15-

99.htm). Moreover, in order to alleviate this burdensome

result, we would have no choice but to also import the opt-out

provision available for income received from installment

sales, 26 U.S.C. § 453(d). Cf. Warren Jones Co., 524 F.3d at

792-93 (determining that Congress enacted the opt-out provision to alleviate the “hardships” associated with reporting an

installment sale as the full fair market value of the property,

received on the date contracted). We have found no congressional support for such overreaching. Congressional intent is

clear: structured settlements are to be taxed as payments are

received. 

IV

Polone also argues that pre-amendment § 104 should apply

to the settlement payments he received in November 1996,

13790 POLONE v. COMMISSIONER OF INTERNAL REVENUE
May 1997, and November 1998 because applying amended

§ 104 to those payments would amount to retroactive legislation in violation of his Fifth Amendment due process rights.2

We review this constitutional claim de novo. Quarty v. United

States, 170 F.3d 961, 965 (9th Cir. 1999). 

[7] Retroactive legislation runs the risk of offending the

Due Process Clause of the Fifth Amendment, Landgraf v. USI

Film Prods., 511 U.S. 244 (1994), and the Supreme Court has

provided various formulas for determining whether a particular statute applies retroactively. For example, the Court has

considered whether a statute “takes away or impairs vested

rights acquired under existing laws,” id. at 269 (quoting Society for Propagation of the Gospel v. Wheeler, 22 F. Cas. 756

(CC NH 1814)), or whether a law “changes the legal consequences of acts completed before its effective date,” id. at 269

n.23 (quoting Miller v. Florida, 482 U.S. 423, 430 (1987)). 

[8] The thrust of the various tests is that to operate retroactively, a statute must actually “attach[ ] new legal consequences” to completed, past conduct. Id. at 270. It is not

enough that a statute “is applied in a case arising from conduct antedating the statute’s enactment,” or that a statute “upsets expectations based in prior law.” Id. at 269-270. Thus, for

example, even though “a new property tax or zoning regulation may upset the reasonable expectations that prompted

those affected to acquire property,” a change in the property

tax regime would not be considered retroactive with respect

to all who had purchased property prior to the effective date

of the amendment. See id. at 270 n.24. 

2We do not address whether amended § 104(a)(2) violates the Sixteenth

Amendment of the Constitution, as Polone failed to raise the issue on

appeal. The power of Congress to tax income is provided in the Sixteenth

Amendment: “The Congress shall have power to law and collect taxes on

incomes, from whatever source derived, without apportionment among the

several States, and without regard to any census or enumeration.” 

POLONE v. COMMISSIONER OF INTERNAL REVENUE 13791
[9] Applying this test to § 104, we hold that amended § 104

was constitutionally applied to the payments Polone received

in November 1996, May 1997, and November 1998. As

explained above, the amendment to § 104 explicitly applied

only to amounts received after its effective date, which was

August 20, 1996. 26 U.S.C. § 104, Application of August 20,

1996 Amendments. Although it is possible for a statute with

a seemingly prospective application to apply retroactively in

some circumstances, Landgraf, 511 U.S. at 258-59, the

amendments to § 104 did not because they did not attach new

legal consequences to completed payments. On the contrary,

the amendments applied only prospectively, to payments

made after their date of enactment. Compare with Untermeyer

v. Anderson, 276 U.S. 440, 445 (1928) (a tax was retroactive

where it applied to “bona fide gifts not made in anticipation

of death and fully consummated prior to” the statute’s effective date) (emphasis added); Blodgett v. Holden, 275 U.S.

142, 147 (1927) (same). 

[10] Polone argues that the amendments to § 104 apply

retroactively because his settlement with UTA was “finalized

on May 3, 1996, more than three months before the enactment

of the statute.” This argument is unconvincing for two reasons. First, although the settlement contract may have been

“finalized” in the sense that both parties signed it, settlement

of Polone’s defamation claim was nowhere near complete as

of August 20, 1996. On the contrary, UTA still had to make

three payments to Polone, and he had to honor his promise to

guard UTA’s confidential information. Thus, the Tax Court

did not apply amended § 104 to a contract that was “fully consummated” prior to the amendment’s effective date, as was

the case in Untermeyer and Blodgett. Rather, amended § 104

was applied to a contract whose fulfillment was still a work

in progress. Second, Polone’s argument falls squarely into the

Supreme Court’s warning that “[a] statute does not operate

‘retrospectively’ merely because it is applied in a case arising

from conduct antedating the statute’s enactment.” Landgraf,

511 U.S. at 269. The fact that Polone’s tax dispute stemmed

13792 POLONE v. COMMISSIONER OF INTERNAL REVENUE
from his settlement with UTA — conduct that antedated the

revisions to § 104 — does not mean that § 104 operates retrospectively when it is applied to settlement payments that

Polone received after its effective date. 

V

For the reasons explained above, we agree with the Tax

Court that the settlement payments received by Polone after

August, 1996 are taxable as ordinary income. 

AFFIRMED.

POLONE v. COMMISSIONER OF INTERNAL REVENUE 13793