TAX COURT OPINION

Case: Degaulle Cabinda
Docket Number: 10949-16
Judge: Gustafson
Opinion Type: bench
Filed: 11/15/2017
Pages: 12

SYM UNITED STATES TAX COURT WASHINGTON, DC 20217 DEGAULLE CABINDA, Petitioner, v. ) ) ) ) Docket No. 10949-16. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the proceedings in the above case before the undersigned judge at Washington, D.C., containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. November 15, 2017 SERVED Nov 15 2017 3 1 2 Bench Opinion by Judge David Gustafson October 20, 2017 3 . DeGaulle Cabinda v. Commissioner of Internal Revenue 4 5 6 7 8 9 10 l'1 12 13 14 15 16 Docket No. 10949-16 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Tax Court Rule 152; and it shall not be relied on as precedent in any other case. Petitioner DeGaulle Cabinda filed his tax return for the year 2013 in November 2014. (Stip. 2.) By a statutory notice of deficiency ("SNOD") dated February 8, 2016 (Ex. 4-J), the Internal Revenue Service ("IRS") determined a deficiency in Dr. Cabinda's 2013 federal income tax, plus an accuracy-related penalty under section 17 6662(a) (which the Commissioner has since conceded) and an 18 addition to tax under section 6651(a)(1) for failure to 19 file timely. After petitioner's concession of the 20 addition to tax and of two minor income issues (i.e., $34 21 of interest and $2,687 of discharge-of-indebtedness 22 income; see Stip. paras. 7-8), the issue for decision is 23 whether $234,000 that Dr. Cabinda received in a settlement 24 25 is taxable. We hold that it is not. The case was tried in Washington, D.C., on IClibers 73)406·2250|operationseenribersnet|wwwsscribersnet Octoberä, 2017. Dr. Cabihda represented himself, and respondent was represented by Trevor B. .Maddison. . FINDINGS OF FACT Background Petitioner DeGaulle Cabinda was born in Camero6n. He ·is a medical doctor. He was diagnoséd with Guillain-Barre Syndrome in 2002. (Stip. 9. ) He thereafter recovered to full health. Employment by Pharma In 2008, after 18 years of experience as a 6 E 10 11 medical professional, Dr. Cabirida was employed as senior . 12 medical director. of a pharmaceutical company . ( "Pharma") 13 14 15 (Ex. 5-J, para. 3) . He cohsidered this to be a crowning achievement that brought him to the pinnàcle of his career. 16 Termination and Relapse 17 18 In 2010 Pharma terminated Dr. Cabinda for alleged reasons that he disputed. He believed that the 19 actual reason for his termination wais discrimination 23 against him on the basis o.f his, race (black) and national. 2.t origin. 22 The termïnation was extremely.stressful to Dr. 2 3 Cabinda and constituted, ·in his view, the ruin of his 21 career. As a result of the stress of his termination, Dr. 2½ Cabinda experienced a serious recurrence of his $73)406-225h|oper ti n eNrbe snet www.escribers.net . Guillain-Barre symptoms in October 2010 and was 2 hospitalized (Exs. 7-P, 9-P, 10-P) for the first of three times. Dr. Cabinda has suffered, at times, from. nearly . complete paralysis and believes he nearly died. As a result of his medical bills and unemployment, his financial resources have been exhausted (requiring one of his children to withdraw from college for a time) . (cid:16)042 Even as of the time of trial in this case, he has not fully recovered and still suffers extreme weakness. Charge and Complaint In December 2010, Dr. Cabinda filed with the Equal Employment Opportunity Commission ("EEOC") against Pharma a "Charge of Discrimination" (Ex. 5-J, para. 14; "Exhibit A"), which alleged (in para. XIV), "As a result of the discrimination, I have suffered damages including, without limitation, pain and suffering and lost wages. " In late October 2011 Dr. Cabinda received from 7 9 10 11 12 13 14 15 16 17 18 . 19 the EEOC his "Notice of Right to Sue" (id., "Exhibit B") . 20 21 22 23 24 25 (In December 2011 he suffered another Guillain-Barre. episode.) In January 2012. he filed suit against Pharma (Stip. 14), and he filed a first amended complaint in July 2012 (Stip. 15, Ex.. 5-J) . His amended complaint alleges (at paras. 85, 93, 99) that: "As a direct and proximate result of the BEEE 1973)406-2250|operationseescribetsnetlwww.escribersnet Defendant's conduct, Dr. Cabinda has suffered damages, including but not limited to, lost wages, lost benefits, loss of future employment 6 . commensurate with his experience and professional standing, loss of status and self- esteem, including damages, great expense, pain and suffering in the form of emotional distress, anxiety, embarrassment, and humiliation, and physical pain and suffering and medical bills for reoccurrences of his Guillain-Barre syndrome, which he continues to endure." The "Requested Relief" sought in his complaint (at 16) included: a. Backpay and front pay commensurate with seniority and any other lost employment benefits including pension; b. Compensatory damages for emotional distress, loss of Dr. Cabinda's hard-earned reputation through more than 20 years of devotion to his work, the loss of career advancement which could have been made for the last two 1 2 3 4 5 (i . - f: 9 30 31 32 33 14 15 16 17 18 19 20 years, and physical pain and suffering and medical bills 21 22 23 24 related to his Guillain-Barre syndrome; c. Punitive damages; d. Pre- and post-judgment interest; [and) e. Reasonable attorneys' fees and costs...." 25 With his first amended complaint, he served on Pharma 973)406-2250|operations9esttR»fsnetlwwwascribers.net 1 2 3 4 5 6 7 8 9 10 11 12 responses to interrogatories (Ex. 8-P), in which he asserted that his Guillain-Barre syndrome "was exacerbated as a direct result of the extreme distress he suffered due to his termination," and with which he released all his health information to Pharma. Dr. Cabinda settled his lawsuit with Pharma (Stip. 20) by means of a settlement agreement (Ex. 13-P), by which he made a "General Release" of "any and all known or unknown claims and causes of action" against Pharma, in return for which Pharma agreed to pay: (a) $200,000 to Dr. Cabinda's lawyer "representing attorneys' fees and costs" (not in dispute 13 here); 14 15 ll6 17 18 (b) $156,000 to Dr. Cabinda "representing claimed lost wages and benefits" (not in dispute here); and (c) $234,000 to Dr. Cabinda "representing alleged non-wage damages," the subject of the current 19 dispute. 20 21 The agreement stated that Pharma takes "no position on how you choose to allocate or spend any portion of the moneys 22 paid to you under this Agreement." In the agreement, 23 Pharma took no position as to the tax consequences of the 24 payments. Pharma paid those amounts in 2013 (and 25 evidently reported them to the IRS on Forms W-2 and 1099). 1 51|E!3 (973)406-2250|operations@escribersnet|www.esaibersmet . 8 1 2 3 4 5 5 7 3 9 0 1 2013 Tax Return On his 2013 tax return (Ex. 1-J), Dr. Cabinda reported as wages on line 7 the $156,000 payment "representing claimed lost wages and benefits," but he did not report the $234,000 "representing alleged non-wage .damages." The IRS compared his return to the Forms W-2 and 109.9. that Pharma had submittèd and perceived that the $234,000 had not been reported on the return. The IRS, therefore, adjusted Dr. Cabinda's taxable income to- include that amount; and on February 8, 2016, it issued to him an SNOD (Ex. 4-J) on which it determined the resulting 2 deficiency of tax. .3 On May 9, 2016, Dr. Cabinda timely filed his 4 p.etition in the Tax Cour.t, disputing the deficiency so 15 ]6 J7 18 9 determined. At that time he resided in Maryland. OPINION I. General Legal Principles A. .Burden of Proof The IRS's determination in the SNOD is presumed 20 correct. The taxpayer generally bears the burden to prove 21 his entitlement to any deductions he claims; Rule 142(a). 22 The Commissioner has the burden of production as to 23 penalties and.additions to tax. See section 7491(c). 24 25 B. Principles of Section 104(a) (2) Section 61(a) provides: "Except as otherwise (973)406-2250loperations estilbersnetlwww.escribers.net 1 2 3 4 5 5 7 3 9 providéd in this- subtitle, gross income means all income from whatever source derived." One exception is provided in section 104(a)(2), under which amoùnts are excluded from income if they werè "received ... on account of personal physical injuries or physical sickness." Section . 104(a).is clear that "emotional distress shall not be treated as a physical injúry or physical sickness." Even if we give full attention to the legislative history of this ·statutory provision and assume that "the term :.0 emotional distress includes symptoms (e.g., insomnia, ..1 :.2 13 34 35 16 headaches, stomach disorders) which may result from such emotional distress," H. Conf. Rept. 104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041, those "symptoms" are not on a scale with Dr. Cabinda's hospitalization, paralysis, and enduring disability. The Commissioner evidently agrees, because he 17 acknowledges in his pre-trial memorandum (at 8, n.1) that 18 Guillain-Barre is not a mere "symptom of emotional 19 distress". 20 Dr. Cabinda credibly and movingly testified that 21 his termination by Pharma caused the onset of debilitating 22 23 24 25 and life-threatening physical sickness, and he contends that the entire $234,000 is excluded from taxable income on that basis. The Commissioner contends that Dr. Cabinda failed to carry his burden of attributing the payment to 73)406-2250lopeutions®estabers.net|www.escribers.net 1 2 3 4 5 6 7 3 3 LO 1 2 3 :.4 35 physical sickness. To evaluate the parties' contention, we must consider how to allocate Pharma's payments among the claims in Dr. Cabinda's complaint. Of course, Pharma's payment of $156,000 is properly allocated to "Backpay and front pay commensurate with seniority and any other lost employment benefits including pension", and Dr. Cabinda properly reported that payment as taxable. But the $234,000 is the subject of dispute. II. Analysis The payment of $234,000 ("representing alleged non-wage damages," according to the settlement agreement) is what Dr. Cabinda received in arguable satisfaction of (in the words of the "General Release") "any and all known or unknown claims and causes of action," including six items in~ his complaint's "Requested Relief" -- i..e., "[l] ]6 Compensatory damages. for emotional distress, [2] loss of ]7 Dr. Cabinda's.hard-earned reputation through more than 20 . 38 years of devotion to his work, [3] the loss of career 19 advancement which could have been made for the last two 20 years, [4] physical pain and suffering and medical bills 21 22 23 24 25 related to his Guillain-Barre.syndrome; ... [5] Punitive damages; [and] ... [6] Pre- and post-judgment interest." "The release.instrument made no apportionment of the ... settlement payment among the compromised claims. In the circumstances, we .must make an allocation BEEE (973)406-2250|opentions®escribers.net|wwwescribers.net . 11 1 2 3 4 5 7 9 ourselves." Eisler v. Commissioner, 59 T.C. 634, 640 (1973). "If the settlement agreement lacks express language stating the claims that payment was to settle, the intent of the payor .... is critical to that determination," Longoria v. Commissioner, T.C. Memo. 2009-162, slip op. at 17, but Pharma, the payor, explicitly declined in the agreement to allocate the nonwage payment among these claims. As we noted, the Commissioner contends that Dr. O Cabinda failed'to carry his. burden of attr,ibuting the 1 payment to physical sickness, and Dr. Cabinda does indeed J2 J3 have the burden of proof. But apart from that general contention, the Commissioner offered no evidence and made J4 no argument to suggest relative values of, or to attribute J5 the payment to,. any of these other forms of relief. J6 17 18 Dr. Cabinda believed that his physical sickness was the overwhelming ground of his claim, and his decision to settle his discrimination case was plainly motivated by 19 that conviction. Especially in the absence of any 20 evidence of a different intent by the other party, the 21 plaintiff's motive and purpose for settling is surely 22 entitled to weight. 23 24 25 In addition, we see no evidence or reason to imagine values for the öther five of the six forms of "Requested Relief." If we put ourselves in the role of 73)406-2250loperationseescribers.net|www.escibersaet 12 it defense counsel evaluating Pharma's settlement hazards, seems clear that Dr. Cabinda's Guillain-Barre recurrence would be the great motivator toward settlement. A jury could not fail to be moved by Dr. Cabinda's plight, and Pharma's attorneys could not fail to so observe. We therefore conclude that the settlement payment was attributable to Dr. Cabinda's physical sickness. However, the Commissioner "maintains petitioner was compensated in part for emotional distress and that such compensation would not be excludable even where the emotional distress resulted in physical symptoms." This seems to be a contention that: some portion of the . $234,000 must be attributable to emotional distress; that portion is not excludable; and none of the settlement payment is excludable unless the petitioner can prove an allocation to items other than emotional distress. This conceives of emotional distress and physical sickness as being two distinct and competing claims to which a payment might be allocated -- and so they are in many circumstances. But someone who suffers physical injury or sickness will almost always suffer some emotional distress 1 2 3 4 5 6 7 8 9 10 11 12 13- 14 15 16 1 18 19 20 21 22 along with that physical injury or sickness, and.the 23 Commissioner's reading of section 104(a) would almost 24 nullify section 104(a)(2). The injured victim of an 25 outright physical assault is clearly entitled to exclude (973)406 2250loperationseeserbers.net |www.escrbers.net . L 2 3 a !i 6 his damages from income, but if he admits that his . (cid:16)042 physical ,injury has also caused him emotional distress, then thë Commissioner's position taken here would require that a (taxable) portion of thé damages must be allocated to that émotional distress. This cannot be right. We think that Dr. Cabinda's 234,000 settlement payment was áttributable to his physical injury and that 8 any attempt to allocate'the payment among his other claims would be eithet hair-splitting or- outright speculation. O 1 12 13 14 15 16 III. Addition to Tax The IRS has the burden of production -- see section 7491(c) --- to show that Dr. Cabinda is liable for thé addition to tax determined against him in the SNOD for failure to timely file his return, under section 6651(a)(1). However, Dr. Cabinda concedes his liability for the addition to tax, so the Commissioner thereby meets 17 his burden. Dr. Cabinda. will, therefore, owe the addition to tax, although measured. by a smaller deficiehcy than is in the SNOD. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 2:59 p.m., the above-entitled . matter was concluded.) 18 19 23 21 22 2 3 21 2 i (973)406-2250|opetitions®erribers.netlwwwascribersnet