TAX COURT OPINION

Case: Judith A. Grignon
Docket Number: 22930-16S
Judge: Panuthos
Opinion Type: bench
Filed: 11/07/2017
Pages: 8

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 JUDITH A. GRIGNON, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 22930-16S. ) ) ) ) ORDER Pursuant to Rule 152(b), 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 trial in the above case before Special Trial Judge Peter J. Panuthos at Philadelphia, Pennsylvania, on October 17, 2017, containing 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, a decision will be entered for respondent. (Signed) Peter J. Panuthos Special Trial Judge Dated: Washington, D.C. November 7, 2017 SERVED Nov 07 2017 . 3 1 2 3 4 5 6 7 8 9 10 11 12 Bench Opinion by Special Trial Judge Peter J. Panuthos October 17, 2017 Judith A. Grignon v. Commissioner Docket No. 22930-16S The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This case was heard as a Small Tax case pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. This bench 13 opinion is made pursuant to the authority granted by 14 section 7459(b) of the Internal Revenue Code of 1986, as 15 16 amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Section references contained in this bench 17 opinion are to the sections of the Internal Revenue Code 18 of 1986, as amended, in effect for 2014, and all Rule 19 references are to the Tax Court Rules of Practice and 20 Procedure. 21 22 23 24 By notice of deficiency dated July 25, 2016, respondent determined a deficiency in petitioner's Federal income tax for the taxable year 2014 in the amount of $15,611. Respondent determined in the notice of 25 deficiency that $64,321 in settlement proceeds, which (973)406-2250|operations®escribersnetlwww.escribersnet 1 2 3 4 5 6 7 8 9 10 11 petitioner did not report on her 2014 Federal income tax return, was includable in petitioner's gross income. Respondent also determined that petitioner was liable for a section 6662(a) accuracy-related penalty in the amount of $3,122. Respondent conceded the section 6662(a) accuracy-related penalty. The remaining issue for decision is whether petitioner may exclude $64,321 from gross income relating to the proceeds received from the settlement of a lawsuit. Some of the facts have been stipulated, and we incorporate the stipulation of facts by this reference. 12 Petitioner resided in New Jersey when the petition was 13 14 timely filed. In approximately 2001, petitioner was hired by 15 the New Jersey Agricultural Society (NJAS), a non-profit 16 organization not connected with the State of New Jersey, 17 to direct a program known as "New'Jersey Farmers Against 18 Hunger" (NJFAH). The program assisted local farmers to 19 donate surplus proceeds (sic) to area soup kitchens, food 20 pantries, and those in need in the State of New Jersey. 21 The program director was responsible for marketing and 22 soliciting donations. 23 At some point, NJFAH received a separate non- 24 profit status; however, petitioner, as director of the 25 program, was restricted by NJAS in her ability to manage (973)406-2250|operations®escribersnetjwww.escribersnet 1 2 3 4 5 6 7 8 9 funds, including opening a separate bank account for NJFAH. Petitioner organized major fund raising events for NJFAH; however, management of NJAS did not permit NJFAH to retain the funds received. In 2011, petitioner met with the management and asserted that NJAS was improperly commingling funds and otherwise had taken improper actions with respect to NJFAH. Petitioner was advised to "keep her head down" and not ask questions regarding the funding of NJFAH program. 10 As a result of her disagreement with management and belief 11 12 that NJAS was acting improperly, petitioner resigned from her position in 2011. Petitioner suffered extreme 13 emotional stres.s during this period. 14 In 2012, petitioner filed a complaint against 15 her former employer, NJAS, in the Superior Court of New 16 Jersey, Law Division, Hunterdon County. The complaint 17 alleged the following seven counts as the bases for the complaint: 18 19 (1) Violation of public policy; (2) violation of 20 the New Jersey Conscientious Employee Protection Act; (3) 21 22 fraud; (4) declaratory judgment; (5) violation of the New Jersey Law Against Discrimination; (6) intentional 23 infliction of emotional distress; and (7) negligent 24 infliction of emotional distress. 25 Petitioner and NJAS eventually reached a BEIEI (973)406-2250|operations@escribers.netlwww.escribers.net 6 1 2 3 4 5 6 7 8 9 settlement in this dispute. In the settlement agreement, dated August 2nd, 2014, NJAS agreed to pay petitioner $175,000. Of that $175,000-settlement amount, after attorneys' fees and litigation costs, petitioner received $38,500 (before federal and state income tax withholding) for lost wages and $64,321 for "damages associated with emotional distress". Petitioner timely filed a federal income tax return for 20·14. Of the settlement proceeds she received 10 in 2014, petitioner reported only the $38,500 in 11 12 13 settlement proceeds attributable to lost wages as taxable income. In unreported income cases, the Commissioner 14 must base the deficiency on some substantive evidence .that 15 the taxpayer received unreported income. Hardy v. 16 Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff'g 17 18 T.C. Memo. 1997-97. If the Commissioner introduces some evidence that the taxpayer received unreported income, the 19 burden shifts to the taxpayer. Since petitioner 20 acknowledges receipt of the settlement proceeds, -the only 21 issue before us is whether the settlement proceeds are 22 23 excludable under 104(a)(2). Damages (other than punitive damages) received 24 for personal physical injuries or physical sickness may 25 generally be excluded from gross income; section (973)406-2250|operations@escribers.net|www.escribersmet 7 1 2 3 4 5 6 7 8 9 104(a)(2). Emotional distress is not treated as a personal physical injury or physical sickness; section 104(a) (flush language). However, damages for emotional distress attributable to a physical injury or physical sickness are excludable from income under section 104(a)(2); section 1.104-1(c)(1), Income Tax Regs. Stress-induced sickness does not qualify; the personal physical injury or personal physical sickness must instead be the cause of the stress. Prasil v. Commissioner, T.C. 10 Memo. 2003-100, 2003 WL 1844811, at *4. 11 12 13 According to the legislative history of section 104(a)(2), emotional distress includes symptoms caused by stress such as "insomnia, headaches, and stomach 14 disorders". Id. at *3 (citing H.R. Conference Rept. No. 15 16 104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041 n.56). When damages are received pursuant to a 17 settlement agreement, the nature of the claim that was the 18 basis for settlement, and not the validity of the claim, 19 controls the damages that are excludable under 104(a)(2); 20 United States v. Burke, 504 U.S. 229, 237 (1992). An 21 express allocation in the settlement agreement is 22 generally binding for tax purposes provided the agreement 23 was entered into by adversarial parties acting at arm's 24 25 length and in good faith. Bagley v. Commissioner, 105 T.C. 396, 406 (1995), aff'd, 121 F.3d 393 (8th Cir. 1997). (973)406-2250|operations@escribers.net|www.escribers.net 8 1 2 3 4 5 6 7 8 9 If the settlement agreement lacks an express statement of what the settlement amount was paid to settle, we look at the intent of the payor, which we determine on the basis of all the facts and circumstances of the case, including the complaint that was filed and the details surrounding the litigation. Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), aff'g T.C. Memo. 1964-33. The settlement agreement specifically provides 10 that the payment of $64,321 represents damages associated 11 with emotional distress. There is neither a claim of 12 personal physical injury in the complaint nor in the 13 settlement agreement. On the basis of the entire record 14 it appears that, to the extent petitioner suffered 15 personal physical injury or personal physical sickness, 16 that injury or sickness was the result of her emotional 17 distress. It does not appear that the emotional distress 18 19 was caused by her physical injuries and physical sickness. We conclude that the settlement proceeds were 20 not intended to compensate petitioner for personal 21 physical injuries or physical sickness. Thus, 22 petitioner's claims of physical injury and physical 23 sickness are not the type for which damages qualify for 24 25 income exclusion under 104(a)(2). Petitioner testified that she believed she was BEElli (973)406-2250|operations©escribers.net|www.esenbersnet 1 2 3 being punished for her actions should took against NJAS. The Court explained that the Internal Revenue Service simply was seeking to enforce the Internal Revenue Code as 4 written by Congress. The Court also noted that respondent 5 6 7 8 9 had conceded the section 6662(a) accuracy-related penalty. To reflect the foregoing, a decision will be entered for respondent as to the deficiency and for petitioner as to the section 6662(a) penalty. This concludes the Court's oral findings of fact and 10 opinion in this case. (Whereupon, at 10:32 a.m., the above-entitled matter was concluded.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ) BElBI (973)406-2250|operations®escribers.net|www.escribers.net