TAX COURT OPINION

Case: Larry Joe Hartley
Docket Number: 17297-19S
Judge: Leyden
Opinion Type: bench
Filed: 02/10/2021
Pages: 16

UNITED STATES TAX COURT WASHINGTON, DC 20217 Petitioner v. Respondent ) ) ) ) ) ) ) ) ) Docket No. 9980-19S, 17297-19S. Larry Joe Hartley, Commissioner of Internal Revenue, and to respondent a copy of the pages of the transcript of the trial in the above cases before Special Trial Judge Diana L. Leyden at Tampa, Florida, on November 10, 2020, containing her oral findings of fact and opinion rendered at the conclusion of the trial. entered under Rule 155. Pursuant to the Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to Petitioner In accordance with the oral findings of fact and opinion, decision will be O R D E R (Signed) Diana L. Leyden Special Trial Judge Served 02/10/21 RECEIVED 11/16/20 IN THE UNITED STATES TAX COURT CLC In the Matter of: LARRY JOE HARTLEY, Petitioner, V. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) Docket Nos. 9980-19S ) 17292-19 ) ) ) ) ) ) ) Consolidated Pages: 1 through 14 Place: Washington, DC (Remote Proceeding) Date: November 13, 2020 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 IN THE UNITED STATES TAX COURT In the Matter of: LARRY JOE HARTLEY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket Nos. 9980-19S ) 17292-19 ) ) ) ) ) ) ) Consolidated United States Tax Court 400 Second Street, NW 3rd Floor, South Courtroom Washington, District Of Columbia 20217 (Remote Proceeding) November 13, 2020 The above-entitled matter came on for bench opinion pursuant to notice at 11:48 a.m. BEFORE: HONORABLE DIANA L. LEYDEN Special Trial Judge APPEARANCES: For the Petitioner: No Appearance For the Respondent: No Appearance conm P R O C E E D I N G S 2 (11:48 a.m.) THE CLERK: Recall from the calendar, docket number 9980-19S consolidated with docket number 17292-19S, Larry Joe Hartley. (Whereupon, a bench opinion was rendered.) 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 cuners 3 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Diana L. Leyden November 13, 2020 Larry Joe Hartley v. Commissioner of Internal Revenue Docket Nos. 9980-19S, 17292-19 THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THESE CONSOLIDATED CASES, 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. 10 See Rule 152(c), Tax Court Rules of Practice and 11 Procedure. 12 Hereinafter in this bench opinion, all Rule 13 references are to the Tax Court Rules of Practice and 14 Procedure, and all section references are to the Internal 15 Revenue Code, as amended, in effect at all relevant times. 16 This proceeding was heard as a Small Tax Case 17 pursuant to the provisions of section 7463 and Rules 170 18 through 174. This bench opinion is made pursuant to the 19 authority granted by section 7459(b) and Rule 152. 20 The Court uses the term "Internal Revenue 21 Service" or "1RS" to refer to administrative actions taken 22 outside of these proceedings. The Court uses the term 23 "respondent" to refer to the Commissioner of Internal 24 Revenue, who is the head of the IRS and is respondent in 25 this case, and to refer to actions taken in connection 1 2 3 4 with this case. The trial of this case was conducted by remote Proceeding on November 10, 2020 for the Trial Session for Tampa, Florida. Petitioner appeared on his own behalf. 4 5 Michael Garrett appeared on behalf of respondent. 6 7 8 9 10 11 In a notice of deficiency dated March 11, 2019, the Internal Revenue Service (IRS) determined a deficiency in petitioner's 2016 Federal income tax of $4,373. In a notice of deficiency dated June 17, 2019, the IRS determined a deficiency in petitioner's 2017 Federal income tax return of $6,889 and a section 6662(a) 12 accuracy-related penalty of $1,378. 13 The parties have stipulated that for 2017 14 petitioner is not liable for self-employment tax of $3,391 15 and is not entitled to a self-employment tax deduction of 16 $1,696. The parties have further stipulated that for 2017 17 petitioner is not liable for a section 6662(a) accuracy- 18 related penalty of $1,378. 19 The issues for decision by the Court are whether 20 Payments from the City of Marion that were received by 21 petitioner in 2016 and 2017 in the amounts of $26,059 and 22 $24,000, respectively, constitute gross income. For 23 reasons discussed below the Court concludes that they do 24 constitute gross income in those amounts and for the noted 25 years, but that petitioner is entitled to claim attorney's 5 fees as a miscellaneous itemize deductions of $6,514.86 in 2016 and $6,615 in 2017. Background Some of the facts are stipulated and are so found. The first stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in the State of Colorado at the time that the petition was filed with the Court. Petitioner was employed as a firefighter for the 1 2 3 4 5 6 7 8 9 10 City of Marion, Ohio, from approximately June 25, 1989, 11 through December 1, 2012. On July 22, 2005, petitioner 12 was placed on administrative leave. Petitioner filed a 13 14 15 16 grievance and went to arbitration regarding his placement on administrative leave and on March 22, 2006, he was reinstated. On June 4, 2014, petitioner filed a lawsuit 17 against the City of Marion and other related parties. In 18 19 20 21 22 23 24 25 a Complaint on Contract filed by petitioner he alleged the following: 1. The City of Marion did not pay its share toward petitioner's pension as required by statute for the period April 1, 2006 through March 31, 2009. That error was not corrected as of the date the complaint was filed. 2. During a period in which the City of Marion 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 had put petitioner on administrative leave, July 22, 2005 through November 15, 2005, 6 Petitioner was not permitted to use his unused vacation, holiday, and compensatory time. Petitioner filed a grievance asking to be reinstated and to find that he should have been permitted to use unused vacation, holiday, and compensatory time. As a result of the City of Marion putting petitioner on administrative leave he had to purchase military time to put toward his pension for the period of administrative leave by using his own funds of $2,059.46. 3. Petitioner decided to retire as of December 2, 2012. Petitioner was informed that he did not have the requisite 25 years of service to be able to retire and receive his pension. Petitioner paid $18,535.14 to purchase 27 months of military time towards his pension which then allowed him to retire with full pension benefits. Petitioner alleged in the complaint that 23 Pursuant to the Agreement Between the City of Marion and 24 25 the International Association of Firefighters Local 379, signed May 13, 2010, effective for April 1, 2009 through cnners 7 March 31, 2012, he was entitled to one year's salary upon retirement by the City of Marion. Petitioner asked for damages consisting of one year's salary at the hourly rate of $22.54, totaling $56,259.84. Petitioner reached a settlement with the City of 1 2 3 4 5 6 Marion and related defendants in 2006 and signed an 7 8 9 Agreement on May 16, 2016. According to the agreement the City of Marion was to pay petitioner within 30 days of the date of the Agreement two payments: one in the amount of 10 $2,059.44, and the other in the amount of $24,000, and 11 additionally on or before January 31, 2017, to pay 12 petitioner one payment of $24,000. Petitioner concedes 13 his attorney, Jasper Burt, received from the City of 14 Marion checks totaling $26,059.44 in 2016 and one check in 15 the amount of $24,000 in 2017. 16 After Mr. Burt received the checks he issued 17 Petitioner a check dated June 15, 2016 for $19,544.58 and 18 a check dated January 20, 2017, for $17,385 and retained 19 as his attorney's fees amounts of $6,514.86 in 2016 and 20 21 $6,615 in 2017. The City of Marion issued a Form 1099-Misc to 22 Petitioner for 2016 and reported on line 7, "Nonemployee 23 compensation" $26,059.44 and a Form 1099-Misc to 24 petitioner for 2017 and reported on line 7, "Nonemployee 25 compensation" $24,000. Petitioner filed his 2016 and 2017 Federal 8 income tax returns but did not report the amount paid by the City of Marion in 2016 and 2017. The IRS determined that the unreported payments constituted gross income and issued the aforementioned notices of deficiency. Petitioner contends that these amounts are damages and should not be taxable because: (1) the two $24,000 payments petitioner received were for damages he encountered while trying to get the City of Marion to correct its payments to him that should have been non- taxable or deductible contributions to his pension plan 1 2 3 4 5 6 7 8 9 10 11 12 but were instead provided to him as a taxable lump sum; 13 and (2) petitioner paid attorney's fees which were 14 deductible but not deducted; and (3) the $2,059.44 was a 15 reimbursement of a payment petitioner made that the City 16 of Marion refused to pay towards petitioner's tax 17 deductible pension, which petitioner paid using after-tax 18 money so that he could receive his pension. 19 Discussion 20 Generally, the Commissioner's determination of a 21 deficiency is presumed correct, and the taxpayer bears the 22 burden of proving it incorrect. See Rule 142(a); Welch v. 23 Helvering, 290 U.S. 111, 115 (1933). Under section 24 7491(a), the burden of proof may shift to the Commissioner 25 if the taxpayer produces credible evidence with respect to any relevant factual issue and meets other requirements. Petitioner has not argued that section 7491(a) applies nor established that its requirements are met. The burden of 9 proof remains with petitioner. Section 61 provides: "[G]ross income means all income from whatever source derived". Section 61(a)(1) includes as income "[c]ompensation for services, including fees, commissions, fringe benefits, and similar items". The Supreme Court has consistently held that "gross income" was meant to bear "the full measure of [Congress's] taxing power." Commissioner v. Glenshaw 1 2 3 4 5 6 7 8 9 10 11 12 Glass Co., 348 U.S. 426, 429 (1955) (quoting Helvering v. 13 Clifford, 309 U.S. 331, 334 (1940)). The definition of 14 gross income is very broad in scope. Commissioner v. 15 Schleier, 515 U.S. 323, 327 (1995). 16 17 18 19 1. Proceeds from litigation settlement Proceeds from litigation settlements constitute gross income unless a petitioner can prove the proceeds fall within a specific statutory exception. See Stepp v. 20 Commissioner, T.C. Memo. 2017-191 at *8; Devine v. 21 Commissioner, T.C. Memo. 2017-111 at *10; Save v. 22 Commissioner, T.C. Memo. 2009-209, 2009 Tax Ct. Memo LEXIS 23 211, at *4. The taxpayer has the burden of demonstrating 24 that his accession to wealth is exempt from taxation. 25 Commissioner v. Glenshaw Glass Co., 348 U.S. at 430. Petitioner received from the City of Marion 10 checks totaling $26,059.44 in 2016 and a check for $24,000 in 2017 resulting from settlement of petitioner's litigation against the City of Marion. Petitioner testified that he considered the amounts as a form of reimbursement for money he spent out of his own pocket to purchase military time so he could be eligible for a full Pension including time that he had to purchase when he was denied the right to use unused vacation time, holiday, or compensatory time during that period, $2,059.46, and $18,535.14 for purchasing twenty-seven months of his 1 2 3 4 5 6 7 8 9 10 11 12 military service so he would be eligible for a full 13 Pension. However, petitioner also testified that the 14 monies he received were not earmarked for anything and 15 that he had complete control and use of the funds. 16 The complaint which was the basis for the 17 settlement requested damages for unpaid wages, 18 specifically wages equal to one year of service at the 19 hourly rate of $22.54, totaling $56,259.84 which 20 petitioner should have received when he requested 21 retirement. 22 23 24 With respect to the check in the amount of $2,059.44, petitioner claims that it was a reimbursement. In certain limited circumstances if a taxpayer can prove 25 that a payment was made on behalf of another person and that that person reimbursed the taxpayer the payment may 11 be a nontaxable reimbursement. See Fishman v. Commissioner, T.C. Memo. 2011-102, 2011 Tax Ct. Memo LEXIS 100, at *22-25; see also Rivera v. Commissioner, T.C. Memo 2020-7 at *12. The petitioner has not proven that the payment of $2,059.44 was a reimbursement. If petitioner had used vacation, holiday, or compensatory time instead of buying the military time he would have received gross income equal to the vacation, holiday, or compensatory time he used. The record does not support petitioner's claim that the purchase of military time was made on 1 2 3 4 5 6 7 8 9 10 11 12 behalf of the City of Marion. Therefore the Court 13 14 15 concludes that it is not excludable as a reimbursement but rather is gross income to petitioner in 2016. With respect to the remaining amounts the Court 16 concludes that $24,000 was includible in petitioner's 17 gross income in 2016 and $24,000 was includible in 18 Petitioner's gross income in 2017. The Agreement was to 19 resolve the complaint and the damages requested in the 20 complaint were clearly delineated as unpaid wages for a 21 year-long period. The Court understands petitioner's 22 frustration as he thinks that the payments were making him 23 whole for after tax monies he paid out of pocket. 24 However, the law requires payments to a taxpayer over 25 which he has complete control and dominion, including (473) 406-2 250 l operations@esaibetsmet l www.escribersmet monies that are received as damages for lost wages, are taxable to the taxpayer in the year received and there is not any statute that would otherwise exclude it from 12 Petitioner's gross 1ncome. 2. Attorney's fees When a litigant's recovery constitutes gross income, that income includes the portion of the recovery Paid to the litigant's attorney. Commissioner v. Banks, 543 U.S. 426 (2005); Johnson v. Commissioner, T.C. Memo. 2009-156, 2009 Tax Ct. Memo LEXIS 152, at *11. Therefore, even though petitioner paid his attorney's fees from the proceeds of his settlement ($6,514.86 in 2016 and $6,615 in 2017), the entire $50,059.44 settlement ($26,059.44 in 2016 and $24,000 in 2017) is considered gross income to 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Petitioner. nowever, petitioner may deduct the attorney's 16 fees of $6,514.86 in 2016 and $6,615 in 2017 as 17 miscellaneous itemized deductions under section 67. See 18 Commissioner v. Banks at 432; Johnson v. Commissioner, 19 T.C. Memo. 2009-156, 2009-156, 2009 Tax Ct. Memo LEXIS 20 21 22 152, at *11. Miscellaneous itemized deductions are subject to a 2-percent floor, which means that petitioner can deduct his attorney's fees only to the extent that 23 they exceed 2 percent of his adjusted gross income for 24 25 2016 and 2017, respectively. See sec. 67(a). In order to give effect to our disposition of the disputed issues and the concessions of the parties, 13 decision will be entered under Rule 155. THIS CONCLUDES THE COURT ' S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 12:03 p.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 . cnoers CERTIFICATE OF TRANSCRIBER AND PROOFREADER 14 CASE NAME: Larry Joe Hartley v. Commissioner DOCKET NO.: 9980-19S 17292-19 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 14 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by James Shank on November 13, 2020, before the United States Tax Court at its remote session in Washington, DC, in 1 2 3 4 5 6 7 8 9 10 accordance with the applicable provlslons of the current 11 verbatim reporting contract of the Court and have verified 12 the accuracy of the transcript by comparing the 13 typewritten transcript against the verbal recording. 14 17 18 19 20 2 23 24 25 Amy Parnell, CDLT-179 Transcriber 11/14/20 Date Jenhffer Lihddman, CER Proofreader 11/14/20 Date