TAX COURT OPINION

Case: Lori Lynne Fincher
Docket Number: 23956-12
Judge: Holmes
Opinion Type: bench
Filed: 03/06/2014
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 LORI LYNNE FINCHER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ORDER Docket No. 23956-12. 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 Judge Mark V. Holmes at San Diego, California, on January 10, 2014, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. March 6, 2014 SERVED MAR 1 0 2014 Capital Reporting Company (cid:16)042 IN THE- UNITED STATES TAX COURT In the Matter of: LORI LYNNE FINCHER, Petitioner, v. ) ) ) ) Docket No: 23956-12 ) COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) O Pages: 1 through 12 Place: San Diego, California Date: - January 10, 2014 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 4 8 10 11 13 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Cdmpany IN THE UNITED STATES TAX COURT 1 LORI LYNNE FINCHER, Petitioner, v. ) ) ) ) Docket No: 23956-12 ) COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) Room 4228 Federal Build ng 880 Front Street San Diego, California 92101 January 10, 2014. The above-entitled matter came on for . Bench opinion, pursuant to notice, at 11:35 a.m. BEFORE: HONORABLE MARK V. HOLMES JUDGE APPEARANCES: the Petitioner: For (No Appearance) the Respondent: For (No Appearance) ! 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company P R O CEE DIN G S 2 (11:35 a.m.) THE CLERK: Docket Number 23956-12, Lori Lynne Fincher. (Whereupon, a bench opihion was rendered. ) 1 1 2 3 4 5 7 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 25 866.488.DEPO i www.CapitalReportingCompany.com Capital Reporting C mpany 3 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 Bench Opinion by Judge Mark V. Holmes January 10, 2014 1 Lori Lynne Fincher Docket No. 23956-12 THE COURT: In the cas of Lori Lynne Fincher v. Commissioner of Inter al Revenue, Docket Number 23956-12, the Court has d cided to render oral findings of fact and opinion, an the following represents the Court's oral findings of fact and opinion. This bench opinion is miade 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's Rules of Practice and Procedure. Ms. Fincher was a resident of California when she filed the petition. The parties reached a stipulation, which the Court admitted into evidence. It, together with the testimony, are the record of the case. The case arises from Ms. Fincher's failure to file a federal income tax return for the 2009 tax year. The IRS received numerous third-party information returns, and they showed that Petitioner had received significant amounts þf income for the 2009 tax year that she had failed to report. Because 866.488.DEPO www.CapitaIReportingCompany.com Capital Reporting C pany 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 she did not file a return for 2009, the IRS prepared a substitute for return under IRC Section 6020(b) based on those information returns. Indeed, Ms. Fincher did not provide a return to the IRS until two days before trial. She also did not respond to any of the Respondent's requests for ocuments or information, despite filing her p tition on September 26th of 2012. The Court understands and observed that she has undergone significant emotional stress, and claimed not to have opened mail or responded to the mail or phone calls from the IRS. Nevertheless, that's not a valid excuse for not cooperating in pretrial preparation. There are two substanti e issues in the case. The first, and by far the piggest, is the question of unreported income of $100,851 that Ms. Fincher received in 2009 from Time Warner, the company of which she was, until very recently at that point, an employee. This paymenti was the result of the settlement of a lawsuit that she filed against Time Warner, and it was settled, and she was paid off in 2009. So this is one of a long line of cases over the decades in what we do with characterizing 25 partially lump sum payments as between taxable and 866.488.DEPO www.CapitalReportingCompany.com 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 Capital Reporting C mpany 5 non-taxable income. The general rule, of course, is that all proceeds from the settlenent of a lawsuit are includable in income, unless there's an exception. The exception that she points to here, and that the parties contested, is in Section 104 of the Internal Revenue Code, which prov des: "That gross income does not include: (1) amounts rbceived under workman's compenshtion acts as compensation for personal injuries or sickness; and (2) the amount of any damages..;.received ...on account of personël physical injuries or physical sickness . " The Code specifically states in the sabot, or the flush language at the bottom, that: "For purposes of paragraph 2, emotional distress shall not be treated as a physical iajury or physical sickness. The preceding sentence shall not apply to an amount of damages not in excess of the amount paid for edical 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 care...attributable to ·emotional distress. " So I have to look at these two subsections of Section 104. The first is 104(a)(1), which excludes workers' compensation awards. Here, the Tax 1 2 3 4 5 6 Court has recently decided just a couple months ago 7 8 9 that in California, the failure of a settlor to seek and win the approval from the Workman's Compensation Board of the release of liability for claims for 10 workers' compensation prevents that award from being 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 characterized as settlement proceeds under 104(a). California Labor Code Section 5001 states, "No release of liability or comprpmise agreement is valid unless it is approved by th'e Appeals Board or referee." In the case of Simpson v. Commissioner, 141 T.C. Number 10 (October 28, 2013), we held that because the California Court of Appeal, citing this section of the California Labor Code, stated that, "The effect of this section by its clear wording is to make every compromise invalid until it is approved by the Board." See Stellar v. Sears Roebuck, 189 Cal.App.4th 175, 180 (2010). The Court of Appeal held that a compromise agreement seeking to settle both a civil action and a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 related workers' compensation cla m must be deemed to have been conditioned on the .Board's approval. And 3 until parties to a settlement obt in that approval, 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 any compromise and release of workers' compensation liability is invalid. Thus the settlement agr ement between Time Warner and Ms. Fincher is not a valid agreement to . settle any workers' compensation laim that she might have, because she did not seek an obtain the approval of the Board. So she can't exclude any part of the settlement proceeds under RC Section 104(a)(1). That, of course, leaves 104(a)(2), amounts received in compensation for physical injury or physïcal sickness. Now, here, as often happens in these cases, there's really no allocation between physical and emotional distress. Yet that's important in tax law, because only the former are excludable from a person's income In the Simpson case, as in this case, the r.ecord does firmly establish, in his case, through her credible testimony, that Ms. incher suffered physical personal injury, and she suffered considerable emotional distress. But she received in compensation for both those categ ries of injury only 866.488.DEPO www.CapitalReportingCo pany.com Capital Reporting Cdmpany I 8 one lump sum, in this case, $100, 851. One has to do something with these. And what we have done in Tax Court is use our "best judgment." Judge Laro in the Simpson case found that ten percent of the settlement payment was made on account of physical injuries and physical sickness based on largely uncorroborated b t apparently credible testimony from the settling lawyer, whom we don't have the equivalent of in this case. I, on the other hand, whll come up with 20 percent as excludable for Ms. Fincher. That means that 20 percent of the lump sum phyment that she received is excludable under 104 (a) (2) as relating to her physical injuries. In my weighing of the thstimony here, I take into special account the extønt of her clear emotional distress, in part reflebted in her seeming inability to prepare for trial after more than a year, and after being warned even at calendar call that she needed to. get documents o the IRS. Her failure to provide the evidence, the clear emotional strain that she showed while testïfying, was very severe, and weighs heavily ·in favbr of saying that most of the compensation that she received, indeed the overwhelming share of the compensation that she 1 2 3 4 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO I www.CapitalReportingCoßpany.com I Capital Reporting Company 9 1 2 3 4 5 6 received from her former employer, was to compensate her for this genuine and deeply f lt emotional distress. But she also suffers from high blood pressure and other physical conditions that were, although preexisting for the most part, certainly exacerbated by her traumatic employment at Time 7 Warner. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Moreover, she testified credibly that she spent about $500 for a psychopharmacologist, and $4800 for the drugs that he presc ibed, for a total of $5300 that I will allow .her to exclude under the sabot sentence of Section 104, be ause that is the amount paid for medical care attributable to emotional distress. Again, one has to do the best one can with such a thin record. But for the ost part, her testimony was credible, and certainly the emotional stress came out loud and clear in it. So to sum up, a percentage portion of the lump sum award of $100,851 that she received, 20 percent is excludable as relating to physical conditions, plus another $5300 for medical expenses for emotional distress. These are net of her cost of insurance, which is, of course, a personal expense, and any reimbursement that she apparently got in the 866.488.DEPO www.CapitalReportingCpmpany.com Capital Reporting Cornpany 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 form of reduced out-of-pocket payments. The second issue here is a little bit unusual, and that is that she adm tted -- and again, I find her entirely credible on this -- she admitted that in addition to the $100,851, she received $24,168.42 as part of the settlemÅnt that was absolutely, positively for lost wages. That was not known to the Government, so it di not file an amended pleading or anything. Bu she admitted to it. So that's includable in her income, and substantially offsets the amount that I'm excluding under 104(a)(2). However, this math exerbise is subject to the provision in the Code that to assert an increased deficiency, the Commissioner musti formally plead a claim for an increase in either the answer or an amended answer. This the Commissioner obviously did not do, because they didn't know about it until very recently. And even if we looked outside the pleadings, I can't see any increase or assertion of an increased deficiency, for instance, in the 22 pretrial memo. 23 24 25 So net-net, adding in the previously unknown compensation for lost wages, the exclusion of a portion of the lump sum award he Government did k 866.488.DEPQ www.CapitalReportingChmpany.corn .I Capital Reporting Company 11 now about under 104(a)(2), and the provision in the . sabot of Section 104, in the end, lthe Government cannot claim a deficiency of grea er than $38,391, which was the amount asserted by the Government in the notice of deficiency and its retrial memo. There were also penalti s and additions to tax asserted by the Commissioner. There were certainly no valid excuses offere for or defenses offered for any of these. So the penalties and additions to tax under Sections 6 51(a)(1), 6651(a)(2) and 6654 are all susta ned. The Court will issue an order requiring the parties to do the computations when the transcript comes in. And this concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:47 a.m., the above- entitled matter was c ncluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 6 17 18 19 20 21 22 23 24 25 Capital Reporting Co pany I 12 CERTIFICATE OF TRANSCRIBER AND PROOFREADER CASE NAME: Lori Lynne Fincher ,v. Commissioner DOCKET NO. ; 23956-12 We the undersigned, do hereby certify that the foregoing pages, numbers 1 thfough 12, inclusive, are the true, accurate and comple e transcript prepared from the verbal recordin made by electronic recording by Pamela M. Hollinger, on January 10, 2014, before the United States Tak Court at its session in San Diego, Californla, In accordance with the applicable provisions of the urrent verbatim reporting contract of the Court, nd have verified the accuracy of the transcript by comparing the typewritten transcript against th verbal recording. 1)'VI Michael Williamson (Transcriber) (Date) Peg chuerger (Proofreader) (Date) 866,488.DEPO www.CapitalReportingCompany.com