TAX COURT OPINION

Case: Denise Diana Dennis
Docket Number: 22198-09S
Judge: Wells
Opinion Type: summary
Filed: 12/05/2011
Pages: 10

T. C. Summary Opinion 2011-134 UNITED STATES TAX COURT DENISE DIANA DENNIS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 22198-09S. F led December 5, 2011. Denise Diana Dennis, pro se. Joline M. Wang, for resÛondent . WELLS, Judcre: This case was heard ursuant to the provisions of section 7463 of the Intern 1 Revende Code in ef fect when the petition was filed.1 Pursuant t secticái 7463(b), the decision to be entered is not reviewable by any other court, and 1Unless otherwise indic ted, section references are to the Internal Revenue Code of 1986 in effect for the year at issue, and Rule references are to the Tax Court Rules of Practice and Procedure . D DfC - 5 20Ú - 2 - this opinion shall not be treated as precedent for any other case. Respondent d termined a deficiency of $11,396 in petitioner's 2007 F deral income tax and an accuracy-related penalty of $2,279 pursuant to section 6662(a). The issues we must decide are: ( ) Whether proceeds from the settlement of a racial discrimination lawsuit under the Missouri Human Rights Act, alleging emotional distress, are excludable from gross income; (2) whether petitioner failed to report wages of $3,510; and (3) whether petitioner is liable for the accuracy-related penalty pursuant to section 6662(a). Background . Some of the facts and certain exhibits have been stipulated. The parties'.stipulations of facts are incorporated in this opinion by referenc and are foun accordingly. At the time she filed her petition, petitioner was a resident of Missouri. Petitioner was employed at Grandview Care Center, Inc. (Grandview), from approximately August 2005 until she resigned in December 2005. During that,time, she suffered racial harassment from Grandview's resident.s, who spoke to her using racial epithets. Although she complained to her superv.isors, the situation did not imarove;.and she3 eventually rgsigned because her work environment was so unpleasant. After resigning, petitioner filed a 11wsuit against Grandview under the Missouri Human Rights Act, claiming damages for "loss of self-esteem, - 3 - humiliation, emotional distress and ment 1 angui h and pain, and related compensatory damages." Petitioner suffe ed no physical Injurles as a result of the harassment. During une 2007, ' Grandview entered into a confidential se tlement agreement and release (settlement) with petitioner. P .rsuant to the set tlement , Grandview paid petitioner $82, 500 . Of that amount , $3 , 674 . 24 constituted legal expenses , $35, 4 71. 59 was f or attorney's fees, and petitioner received a check for $43,354.1"7. On July 10, 2007, petitioner signed a.document from her attorneys titled "Settlement Distributio - Tax onsequences", which . stated,. among other things · Counsel has informed cljient that th re are omplicated issues surrounding the taxability o discrimination awards and/or settlements. Counsel has further informed Client injuries are generally ttaxable * ayment Éor non-physical . employt ent that * [sic] [sic] that injury cases the decision in he law s unsettled as Internal Revenue Service 460 F.3d 79 (2006) Counsel.informed Client to whether emotional damages in non physical are taxable. Counsel,i:nformed cliegt about Murphy v. holding that such damages are not a ways taxable . Counsel has urged client to obtain professional provide a copy of to determine what, of settlement. Counsel has informed C ient that has been an appeal of that case and the cas may be overturned and/or may not be follow d by th Courts in Missouri * the attached case to the ax professional has on the resolution the tax3 consequence associ ted with this there if any, impact i tax advice and the issue of * *. [s c] The case mentioned in that document, Mur hy v. IPS, 460 F.3d 79 (D.C. Cir. 2006), was later vacated by t e Court of'Appeals for the District of Columbia= Circuit oh December 22, 2006, Murphy v. IRS, 99 AFTR 2d 2007·-396, 2007-1 USTC par. 50, 228 (D. C. Cir. 2006) . The Court of Appeals ssubsequently heard additional arguments before issuing anotiher decision on July 3, 2007, in which it held that the taxpayer' s compensatory award for emotional distress was taxable. .Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 2007) . However, petitioner was not aware of those deve lopment s . . Petitioner rece- ved a Form 1099-MISC, Miscellaneous Income, reporting her income from the settlement. Petitioner spoke with several tax return preparers about y her 2007 tax return. She first spoke with someone .at Jackson Hewitt, to whom she gave a copy of her Form 109÷. The tax return preparer at Jackson Hewitt asked her about the lawsuit . Petitioner told her: "Well, I am not supposed to disclose, but it is emotional distress." The tax return preparer at JEckson Hewitt was unsure about the tax consequences of the settlement, sotshe. called someone. However, that person apparently did not know either, and Jackson Hewitt never gave petitioner an answer about the tax consequences. Petitioner then left Jackson Hewitt because she did not think the people there knew what they were doing. Petitioner called another tax return preparer and inquired on the phone about wl-ether the. proceeds of a settlement from a lawsuit seeking damages for emotional distress were taxable. She could.not remember whom she had called, ut she remembered that the of f ice was at 47th and" Troost . The person w th whom petitioner spoke on the phone told her that the roceeds- of the settlement were not taxable. Next, petitioner sought advice from Jarods ccounting Services . However, petitioner did not g ve the tax return preparer at that firm a copy of her Form 1099 be ause she could not find it. She told the tax return pr parer tl at she had received a confidential settlementabut did not a k the preparer about the tax consequences df the settlethent . The teix return preparer did not ask petitioner for the orm 109 , and she omitted from petitioner's return the incéme froml the settlement. During 2007, petitioner received $3 510 in ages from a woman named Barbara Biederman (Ms . Biederman) fo whom petitioner provided caretaking services . However, 1Êetition r did not report those wages on her return because she had not received a Form W- 2, Wage and Tax Statement. Petitioner called Ms Biederman once to inquire about the Form W-2 and was told it would be mailed to her. Petitioner believed that Ms. Biede man was withholding income tax from her wages, but Ms. Biede man act ally withheld only Social Security .and Medicare taxes . Petitioner did not report the wages she received from Ms. Biederman on her 2007 tax Respondent mailed petitioner a notice of deficiency for her 2007 tax year on July 20, 2009. In the notice of deficiency, respondent determined that petitioner's income should be increased to reflect wages of $3,510 received from Ms. Biederman and other income of 382,500 from the settlement. Respondent allowed petitioner a deduction of $39,146 for her attorney's fees and legal expenses. Petitioner timely filed her petition with this Court. Discussion As a general ru]e, the Commissioner's determinations set forth in a notice·of deficiency are presumed correct, and the taxpayer bears -the btrden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Gross income gererally includes all income from whatever source derived. Sec. 61(a). : The definition of gross income 1s· broad in scope, while exclusions from income are narrowly construed. Commissicner v. Schleier, 515 U.S. 323, 328 (1995). Damages (other than punitive) received on account of personal physical injuries or physical sickness may generally be excluded from gross income. Sec. 104 (a) (2). For the damages to be excluded under this provision, the underlying cause of action must be based in tort or tort-type rights and.the proceeds must be damages received on account of personal physical injury or sickness. Commissioner v. Schleier, supra at 337. Emotional distress is not treated as a personal phÿsical injury or physical sickness except.for damages not in exceså of theJIamount paid for medical care attributable tò emotional distress. Sec. 104 (a) (flush language). Petitioner has cited Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006), to argue that the prdceeds of her settlemènt compensating her for emotional distress'should be exempt from income. However, as noted above, the Murphy decision pet tioner cites was later vacated by the Court df Appeals. Accordingly, we reject petitioner's argument that her income fr m the sÄttlement was nontaxable. We next consider whether petitioner owes income tax on the wages of $3,510 she received from Ms. Bi derman. Petitioner did not dispute that she failed to report her wages from Ms. Biederman on her tax return.y However, she contended that Ms. Biederman had told her that her Federal income tÈx was being withheld from her wages. Refspondent determined that petitioner's Federal income tax had not bpen withheld Because petitioner bears the burden of proof and offered no evidencè to the contrary, we conclude that no income tax had been withheld from the wages petitioner receive from Ms. Biederman and that petitioner failed to pay income tax on those wagës. Finally, we consider whbther petitioner is liable for the accuracy-related penalty pursuant to sec ion 666 (a). Generally, the Commissioner bears the burden of production with respect to any penalty, including the accuracy-related penalty. Sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001). To meet that burden, the Commissioner must come forward with sufficient evidence :.ndicating that it is appropriate to impose the relevant penalty Higbee v. Commissioner, supra at 446. The Commissioner has the burden of production. only; the ultimate burden of proving that the penalty is· not , applicable remains on the taxpayer. Id. . Subsection , (a) of section 6662 imposes an accuracy-related penalty of 20 percent of any underpayment that is attributable to causes specified in subsection (b), including a."substantial understatement" of , ir come ;tax. Section 6664 (c) (1) provides that the accuracy-related penalty shall not apply to any portion of an underpayment if it ie shown that there was reasonable cause for the taxpayer' s posità on with respect to that portion and that the taxpayer acted in go d faith with espect to that portion. The determination of, whe her the t-axpayer acted .with reasonable cause and in good faith is made on a case-by-case basis, taking into account the relevant facts and circumstances. Sec. 1. 6664 -4 (b) (1) , Income Tax Regs . "Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experlence, knowledge, and education of the taxpayer." Id. Generally, the most important factor is the extent of the taxpayer's efforts to assess the proper tax liability. Idx A honest misunderstanding of fact or law that is reasonable in the light of the experience, knowledge, and education of the taxpayer may ind cate reasonable cause and good faith. Remy sv. Commissioner, T.C. Memo. 1997-72. Petitioner is obviously unfamiliar Nith tax law. She was advised by the attorneys who handled her lawsuit that she should seek professional advice regarding the tax treatment of her income from the settlement; . By advising her of Êhe Court of Appeals' holding in Murphy v. IRS, 460 Ff3d 79 (q.C. Cir. 2006), those attorneys also provide;d her with a reason to believe that the income from the settlement might not be taxable.2 Petitioner consulted three different tak preparation serv1ces, and none of them advised her that the income from thë settlement was taxable. On the basis of petitioner's background, education, and actions seeking advice on a complex Itax issue, we conclude that petitioner had reasonable capse for her position Land acted in good faith on her belief, although mistaken, when she failed to 2As noted above, by the time petitioher signNd the "Settlement Distribution - T x Consequences" document prepared by her attorneys on July 10, 2007, 460 F.3d 79 (D.C. Cir. 2006), had been vËcated bý Murphy v. 99 AFTR 2d 2007-396, 2007-1 pSTC par. 50,228 (D.C. Cir. 2006) (vacated Dec. 22, 2006), and the Court of Appeals had decided Murphy v. (deÊided July 3, 2007). Accordingly, the infprmation provided to petitioner by her attorneys was inaccurate even when she signed the document. IRS, 493 F.3d 170 (D.C. Cir. 2Ò07) IRS, the decision in Murphy v. IRS, - 10 y- report her income from the settlement.· Consequently, we hold that petitioner is not liable for the accuracy-related penalty on the portion of her underpayment attributable to income from the settlement. Petitioner contends that she acted reasonably in not reporting her.income from Ms: Biederman because she did not receive a Form W-2 and mistakenly believed that Ms. Biederman had already withheld her Federal income tax. However, it was not necessary that petit:.oner receive a Form W-2 in order for her to know that she had received compensation for her services for Ms. Biederman. See, e.g , Brunsman v.*Commissioner, T.C. Memo. 2003-291.· It was not reasonable for petitioner to simply omit that compensation on her tax return. Accordingly, petitioner is not excused from liability :for thetaccuracy-related penalty on the income she received from Ms. Biederman. In reaching these holdings; we :have considered all the parties' arguments, nd, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit. To reflect the foregoing, Decision will be entered under Rule 155.