TAX COURT OPINION

Case: Jack Dewain Burke
Docket Number: 27301-15S
Judge: Leyden
Opinion Type: bench
Filed: 12/27/2016
Pages: 19

CLC UNITED STATES TAX COURT WASHINGTON, DC 20217 JACK DEWAIN BURKE, Petitioner, v. ) ) ) ) Docket No. 27301-15S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) 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 Diana L. Leyden at San Diego, California, on November 17, 2016, containing her oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. Dated: Washington, D.C. December 27, 2016 (Signed) Diana L. Leyden Special Trial Judge SERVED Dec 27 2016 Capital Reporting Company Bench Opinion by Special Trial Judge Diana L. Leyden 3 November 17, 2016 Jack Dewain Burke v. Commissioner Docket No. 27301-15S I. THE COURT: 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. SEE RULE 152(c), TAX COURT RULES OF PRACTICE AND PROCEDURE. II. This proceeding was heard as a Small Tax Case pursuant to the provisions of Section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. Pursuant to Section 7463(b), the decision entered in this case shall not be treated as precedent for any other case. III. This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Hereinafter in this bench opinion, all section numbers refer to the Internal Revenue Code, as amended and in effect for 2013, the taxable year in issue, and all Rule numbers refer to the Tax Court 4 Rule of Practice and Procedure. IV. The trial of this case was conducted on November 14, 2016, in San Diego, California. 1 2 3 4 5 6 7 8 9 Petitioner, John Dewain Burke, appeared on his own 10 11 behalf. John Myers, a law student, appeared on behalf of respondent. Under Rule 24(a)(5) Special 12 Trial Judge Diana L. Leyden granted permission for 13 Mr. Myers to assist by presenting respondent's case 14 15 16 17 18 at the trial. Mr. Myers was supervised by respondent's counsel Erin Salel. v. In a notice of deficiency dated July 27, 2015, respondent determined a deficiency in 19 petitioner's 2013 ederal income tax of $4,148. In 20 the notice of deficiency, respondent determined that 21 22 23 24 25 petitioner had not reported $54,500 of income paid to petitioner by Home Depot, Inc. (Home Depot). The notice of deficiency also corrected petitioner's tax return by allowing as a miscellaneous deduction an amount of $23,000. The parties stipulated that the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 amount of deficiency in this case as calculated by the notice of deficiency was incorrect due to a computational error. The parties have stipulated that the correct amount of deficiency due to the two changes set forth in the notice of deficiency is $3,233. VI. The issues for decision by the Court are as follows: (1) whether petitioner may exclude from his gross income $54,500 received in settlement of his lawsuit against his employer for unlawful discrimination; and (2) whether petitioner is entitled to a deduction from his gross income in the amount of $23,000 for attorney's fees he paid in connection with the settlement of his lawsuit "above the line" under Section 62(a)(20). VII. Some of the facts have been stipulated, and they are so found. Petitioner resided in California at the time the petition was filed with the Court. Petitioner began his employment with Home Depot in 2005 in Home Depot's New Jersey store as a Pro Sales Account Associate. Petitioner informed Home Depot at the inception of his employment of his 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 Attention Deficit Disorder (ADD). During the time 2 3 4 5 that petitioner worked in the New Jersey store, he was one of the top sales associates worldwide. In October 2008, petitioner explored the option of transferring to another Home Depot store in 6 California or Nevada. Sometime in October 2008, 7 petitioner transferred to the Yucca Valley, 8 California, Home Depot store. The management at the 9 Yucca Valley store was aware that petitioner was a 10 disabled veteran with physical and mental 11 disabilities. These physical disabilities included a 12 13 14 15 16 17 recurring hernia in his groin, spinal disease and damage, and full body osteoarthritis, which caused painful joints in his knees and pain in his back. While employed at Home Depot's New Jersey store, petitioner was assigned to accounts of large customers. When he was transferred to the Yucca 18 Valley store, he was required to handle accounts of 19 many contractors, some of whom were very small 20 21 contractors. As a result of the change in the types of customers that petitioner was assigned to and his 22 mental disability, petitioner began to experience an 23 24 25 inability to remain focused during some periods of time and was not always able to assimilate to new chang8 in an immediate manner. The management of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 Yucca Valley store ignored petitioner's limitations and requests for reasonable accommodation. 3 Petitioner credibly testified that the increased 4 5 6 7 8 stress that resulted from the change that affected his ADD also impacted his physical disabilities. When petitioner's physical disabilities were inflamed or aggravated, petitioner would develop high stress levels, which in turn would cause 9 difficulty staying focused, frustration, diminished 10 mental capacity, and additional physical pain. The 11 12 13 14 15 16 17 18 19 way that petitioner described it there seemed to be a continual feedback loop -- when his ADD was impacted, it caused stress that in turn caused further impairment of his physical conditions. That in turn increased his stress that then increased his ADD symptoms. The management of the Yucca Valley store was aware of petitioner's physical impairments and knew that his physical disabilities affected his 20 mental disability and thereby his ability to focus 21 22 23 24 25 during stressful situations. The management of the Yucca Valley store imposed additional tasks in addition to petitioner's regular duties and responsibilities in March 2010. These additional duties included cold-calling 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 customers, spending one or more hours a day in the paint department soliciting business, spending an hour in front of the store greeting potential contractors entering the store, spending more time in the store scoping out additional contractor business, increased follow-up quotes, and inputting more detailed notes on the current status of contractor accounts or quotes even if such notes were redundant. In June and July 2010, petitioner reported to the manager of associate relations of the Home Depot Human Resources department that he was being discriminated against and harassed on account of his 13 mental disability. Petitioner further reported that 14 his managers were not accommodating his mental 15 disability. 16 17 18 19 20 21 22 23 24 25 In June and July 2010, petitioner was issued performance disciplinary notices by his supervisors and managers. Despite these disciplinary notices, in September 2010, petitioner was issued a performance report commending him for being a good employee and increasing his wages. On September 29, 2010, the Yucca Valley store sponsored an employee lunch. While eating the food served at the lunch, petitioner broke a tooth on a bone in the food. The next day the assistant store 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 manager sent petitioner to a workers' compensation 2 3 4 5 doctor concerning his broken tooth and gave him records and documents to be drug tested. As part of the medical intake, petitioner completed an intake form and indicated on that form that he was taking 6 Adderall for his ADD. Petitioner was given a urine 7 8 9 10 11 12 test and a referral to a dentist. The dentist performed a root canal and saved the tooth. In October 2010, the lab physician who performed the drug test called petitioner to verify that he was taking Adderall. Petitioner confirmed that and provided the lab physician with his Veteran 13 Affairs prescription and information from his 14 15 16 17 treating doctor. Adderall contains dextroamphetamine, a stimulant. On October 27, 2010, petitioner was approached by a supervisor who informed him that a 18 manager wanted to speak with him. The manager 19 20 21 22 23 24 25 informed petitioner that he was terminated because the workers' compensation physician had reported that petitioner had tested positive for speed. Petitioner explained to the manager that the reason he tested positive for speed was because he was taking a prescription for Adderall for his ADD, which was disclosed and known by Home Depot. The manager 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 ignored petitioner's explanation and refused petitioner an opportunity to defend himself or be retested. Sometime in 2012, petitioner hired an attorney who filed a complaint against Home Depot 5 with the Superior Court of California for the County 6 7 8 9 10 11 12 13 14 of San Bernardino. On August 15, 2012, petitioner's attorney filed a First Amended Complaint. It was petitioner's understanding that the original complaint was based on a workers' complaint and that the attorney filed an amended complaint because she determined there were other claims which provided a higher likelihood of success for petitioner. The First Amended Complaint asserted the following 11 causes of action against Home Depot. 15 Petitioner did not know why the original complaint 16 17 18 19 20 21 22 23 24 25 that was filed by his attorney was amended, and he did not have a copy of the original complaint. The following are the titles of 11 causes of action listed in the First Amended Complaint: 1. Discrimination and unlawful employment practices on the basis of mental disability, denial of reasonable accommodation, and refusal to engage in the interactive process; 2. Discrimination and unlawful employment practices on the basis of physical disability and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 denial of reasonable accommodation, and refusal to engage in the interactive process; 3. Retaliation for reporting, complaining, and opposing discrimination; 4. Violation of public policy as it relates to discrimination on the basis of mental 7 disability, denial of reasonable accommodation, and 8 9 refusal to engage in the interactive process; 5. Violation of public policy as it 10 relates to discrimination on the basis of physical 11 disability, denial of reasonable accommodation, and 12 13 14 15 16 17 18 19 20 21 22 23 24 25 refusal to engage in the interactive process; 6. Violation of public policy as it relates to retaliation for reporting, complaining, and opposing discrimination; 7. Wrongful discharge in violation of public policy (random/suspicion-based drug/alcohol testing); 8. Violation of public policy as it relates to invasion of privacy (unreasonable intrusion upon the seclusion of another); 9. Breach of the implied-in-fact contract of employment (wrongful discharge); 10. Breach of oral contract; and 11. Intentional infliction of emotional 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 distress. Under the 1st, 2nd, 3rd, 4th, 5th, and 6th causes of action, the complaint pleads that if petitioner's "physical disabilities [i.e., his recurring hernia in the groin, spinal disease/damage, or full body osteoarthritis which caused painful joints in his knees and pain in his back] were inflamed or aggravated [petitioner] would develop [sic] high stress levels thereby causing pain which 10 would cause difficulty staying focused, frustration, 11 12 13 14 15 16 17 18 19 diminished mental capacity and causing additional physical pain. Management was fully aware of [petitioner's] physical impairments ..." The 1st, 2nd, 3rd, 4th, 5th, and 6th causes of action plead that "By reason of the wrongful acts of the Defendants as hereinabove alleged, [petitioner] will be required to and will employ physicians, surgeons, psychiatrists, and healthcare providers to examine, treat, and care for him and 20 will incur additional medical expenses in an amount 21 22 23 24 25 to be proven at the time of trial." The First Amended Complaint pleads that the injuries petitioner suffered "were not compensable under the Workers' Compensation Act and are not a risk or condition of his employment." 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Petitioner and Home Depot eventually reached an agreement by which Home Depot was required to pay the total amount of $57,500 to settle the lawsuit. Petitioner signed the settlement agreement on March 29, 2013. Paragraph 3 of the settlement agreement references the fact that petitioner filed the lawsuit under the California Fair Employment and Housing Act. Paragraph 4 of the settlement agreement, in pertinent part, sets forth the disbursement of the total settlement sum of $57,500 as follows: (a) $3,000 to petitioner for lost wages; (b) $31,500 to petitioner for claims of compensatory damages (including emotional distress); (c) $23,000 to petitioner's attorney. The total sum of $57,500 was paid during 2013. Petitioner testified that his attorney told him that he did not need to report the amount of the settlement paid for claims of compensatory damages, including emotional distress or the amount paid to her. Relying on the advice of his attorney, petitioner, on his tax return for 2013, only reported the $3,000 paid to him as lost wages. Petitioner did not report the remaining $54,500 and did not take a deduction for the amount of the settlement paid to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company his attorney, $23,000. Petitioner testified that he paid his attorney an additional $10,000 but that it 14 was paid in 2011. VIII. We turn now to the substantive law. In the notice of deficiency, respondent determined that the unreported settlement amount, $54,500, was includable in petitioner's 2013 gross income and that the $23,000 of the settlement paid to 1 2 3 4 5 6 7 8 9 10 petitioner's attorney was deductible as a 11 miscellaneous itemized deduction. Respondent's 12 13 14 15 16 determination in a notice of deficiency that the settlement amount is includable in petitioner's gross income is presumptively correct, and petitioner bears the burden of proof to establish that respondent's determination is erroneous. Rule 142(a); Welch v. 17 Helvering, 290 U.S. 111, 115 (1993). 18 19 In general, unless specifically exempted or excluded, gross income includes all income from 20 whatever source derived. Sec. 61(a); Commissioner v. 21 22 23 24 25 Glenshaw Glass Co., 348 U.S. 426, 429 (1955). According to petitioner, the amounts are excludable because his attorney told him so, and only a small part of the settlement was for pain and suffering. Gross income does not include "the amount 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness". Sec. 104(a)(2). When a taxpayer receives a payment under a settlement agreement, as is the case here, the nature of the claim that was the actual basis for settlement guides our determination of whether such payments are excludable from income. See United States v. Burke, 504 U.S. 229, 237, 112 S. Ct. 1867, 119 L.Ed. 2d 34 (1992). Whether a settlement is achieved through a judgment or by compromise agreement, the question to be asked is: "In lieu of what were the damages awarded?" Fono v. Commissioner, 79 T.C. 680, 692 (1982), aff'd without published opinion, 749 F.2d 37 (9th Cir. 1984). What petitioner and Home Depot intended to compromise through the settlement agreement is a question of fact, see Bagley v. Commissioner, 105 T.C. 396, 406 (1995), aff'd, 121 F.3d 393 (8th Cir. 1997). When damages are paid in connection with a settlement agreement, we first look to the underlying agreement to determine whether it expressly states that the damages compensate for "personal physical injuries or physical sickness" under Sec. 104(a) (2). 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 6 See Pipitone v. United States, 180 F.3d 859, 863, (7th Cir. 1999). If the agreement is ambiguous or lacks express language specifying the purpose of the compensation, courts then proceed to examine the intent of the payor. Id. at 864; Kurowski v. Commissioner, 917 F.2d 1033, 1036 (7th Cir. 1990) 7 aff'g T.C. Memo. 1989-149; Knuckles v. Commissioner, 8 9 10 11 12 13 14 15 349 F.2d 610, 613 (10th Cir. 1965), aff'g T.C. Memo. 1964-33; Domeny v. Commissioner, T.C. Memo. 2010-9, 2010 Tax Ct. Memo LEXIS 9, at *10. The payor's intent can be "based on all the facts and circumstances of the case, including the complaint that was filed and the details surrounding the litigation." See, e.g., Allum v. Commissioner, T.C. Memo. 2005-177, 2005 Tax Ct. Memo LEXIS 178, at *15, 16 aff'd 231 Fed. Appx. 550 (9th Cir. 2007). Under 17 California law, which governs the interpretation of 18 petitioner's settlement agreement with Home Depot, we 19 must consider all credible evidence to determine 20 21 22 whether the language of the agreement is fairly susceptible of more than on interpretation. If it is, we must consider extrinsic evidence relevant to prove 23 which of these meanings reflects the intent of the 24 25 contracting parties. Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 39-40, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 69 Cal. Rptr. 561, 442 P.2d 641 (1968), The settlement agreement is ambiguous as to 3 whether it was made to settle petitioner's claims for 4 5 6 7 8 9 physical injuries (including the injuries to his tooth) or for unlawful termination of his employment or both. The settlement agreement states that petitioner filed an action under the California Fair Employment and Housing Act and that petitioner and Home Depot "desire fully and finally to resolve this 10 litigation and any and all other claims or disputes, 11 whether known or unknown, that have been made or 12 13 14 15 16 17 18 19 20 21 22 23 24 25 could have been made by or on behalf of [petitioner] against Home Depot relating to conduct or events occurring at any time prior to and including the date of" the settlement agreement. However, we accept petitioner's credible testimony that it was his understanding that the intent of the settlement agreement was to compensate him for his physical injuries and physical sickness that had been caused or aggravated by Home Depot's alleged unlawful discrimination. The manner in which Home Depot delineated the payment of the settlement agreement also supports petitioner's understanding of Home Depot's intent. The settlement delineates the total settlement payment into three categories: (1) 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 2 3 4 5 6 7 8 9 $3,000 for lost wages; (2) $31,500 for compensatory damages, including emotional distress; and (3) $23,000 for attorney's fees. The settlement agreement expressly listed an amount to be paid for lost wages. If other amounts of the settlement agreement were to be for lost wages, Home Depot would have expressly noted so. The designation of $31,500 as compensatory damages, taken together with the allegations in the 10 First Amended Complaint that the managers and 11 12 13 14 15 16 17 18 19 supervisors of Yucca Valley store knew about petitioner's physical and mental disabilities further convinces the Court that part of the amount for the compensatory damages was on account of the physical injuries of petitioner. Of the 11 causes of action, the last one was for punitive damages. Awards for punitive damages are not excludable from gross income under Section 104(a)(2). Of the remaining ten causes of action, six of them expressly refer to 20 petitioner's physical injuries or sickness and 21 indicate that petitioner would be seeking damages for 22 medical care by physicians, surgeons, and other 23 24 25 health care advisors. Accordingly, the Court concludes that six-tenths of the $31,500 of the settlement payment, or $18,900, is excludable from 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 19 petitioner's gross income for 2013 under Section 104(a)(2). The remaining amount, $12,600, is includable in the petitioner's 2013 gross income either as compensation for emotional distress or other nonphysical injuries or sickness, which are not excludable from gross income under Section 104(a)(2). For the year in issue, 2013, Section 62(a)(20) allows for a deduction from gross income for attorney's fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination as defined in Section 62(e). Unlawful discrimination includes any act that is unlawful under any provision of federal, state, or local law, or common law claims permitted under federal, state, or local law (1) providing for the enforcement of civil rights or (2) regulating any aspect of the employment relationship. Sec. 62(e)(18). The settlement agreement and general release indicate that the lawsuit was filed based on claims of unlawful discrimination. Therefore, the Court finds that the amount paid to petitioner's attorney, $23,000, is deductible under Section 62(a)(20) as an above-the-line deduction. IX. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company In order to give effect to our disposition of the disputed issues, a decision will be entered 20 pursuant to Rule 155. X. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 9:51 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com