TAX COURT OPINION

Case: Guillermo Mojarro
Docket Number: 1492-14
Judge: Holmes
Opinion Type: bench
Filed: 03/12/2015
Pages: 22

>$a/+rn 6 21 UNITED STATES TAX COURT WASHINGTON, DC 20217 GUILLERMO MOJARRO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 1492-14. 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 transcript of Holmes at Los Angeles, California on February 26, 2015, containing his oral trial session at which the case was heard. findings of fact and opinion rendered at the trial in the above case before Judge Mark V. the pages of the the In accordance with the oral findings of fact and opinion, a decision under Rule 155 will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. March 12, 2015 SERVED MAR 20 2015 Capital Reporting Company 3 1 Bench Opinion by Judge Mark V. Holmes 2 Guillermo Mojarro v. Commissioner 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Docket No. 1492-14 February 26, 2015 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. 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. Mr. Mojarro is a resident of California now, as he was when he filed his petition. The parties were able to reach agreement on a stipulation, which was fortunately consecutively numbered as to its pages, so through the court of this bench opinion I'll be able to refer to the page numbers in the stipulation. Some of those pages were not admitted, but none of those that I'll cite fall into that category. So the stipulation together with the testimony in this case constitutes the record of that case. This case is in some ways a very simple case; it's a one-issue case involving the taxability of a $250,000 settlement that Mr. Mojarro received in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 2011. He disclosed it, but he didn't include it in his taxable income when he filed his return for that year late in 2012. According to Mr. Mojarro, this $250,000 settlement is excludable under Section 401 of the Code. According to the Respondent, it is not, and 7 Mr. Mojarro's failure to include it justifies a 8 9 10 11 penalty, as it resulted in a substantial understatement of his income under Section 6662 for tax year 2011. Let me begin with some background. Mr. 12 Mojarro began his employment with the Post Office in 13 about 1987. He first started working for the Post 14 Office as a distribution clerk, mainly sorting mail. 15 16 17 18 19 20 21 22 Towards the end of- his employment, he spent about 40 percent of his time sorting mail and working at the counter with customers or processing passport applications; 30 percent of his time working as a union steward, and 30 percent as an EEO or Equal Employment Opportunity contact person. The origins of this case really begin about 13 years ago, in 2002, when Mr. Mojarro filed a claim 23 with the Office of Workers' Compensation Programs for 24 disability for spurs and plantar fasciitis. These 25 are foot injuries that can cause extreme pain and, in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 his case, did. Since a counter clerk spends a lot of his employment time on his feet, naturally this resulted in some problems for Mr. Mojarro at work. In any event, it was clear that this was affecting his 6 ability, and it was almost certainly due to having to 7 8 stand up for long periods of time at the Post Office. And so by a letter dated July 20, 2002, the 9 Office of Workers' Compensation Programs found that 10 Mr. Mojarro was eligible to claim disability 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 compensation for this injury. It also entitled him to modified duties at the Post Office to accommodate this disability. And since then Mr. Mojarro has been receiving treatment from a podiatrist at the expense of the Government. But although the Government continues to pay for his care with the podiatrist -- Dr. Katzman was entirely credible on this point and testified that these years of care were all paid for -- the foot injuries were not totally disabling in the sense that Mr. Mojarro couldn't work anymore, but they did require a change in his work duties, a shift to more sedentary work; in other words, take him off his feet for much of the day. But within a few years this work situation 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company I 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 that he faced became completely out of control. He was entitled to an accommodation for a somewhat different work environment, but this led to a very large number of disputes, apparently other workers were -- mail carriers were performing mail clerk duties, and there just wasn't enough reasonable accommodation to go around. This should have been sorted out better, certainly, but these difficulties in finding reasonable accommodation for Mr. Mojarro ended up resulting in spiraling claims of harassment by his supervisors, claims of misconduct by him against them, by them against him. The work environment grew worse and worse. I certainly believe the testimony of Ms. Colleen Street, who was a union representative, another entirely credible witness on this point, that the situation just got out of control. It's not unusual, she said, especially in smaller post offices, where supervisors are under pressure to get the mail sorted and delivered with a limited work force, for them to start skimping on reasonable accommodation, and then that can spiral out of control in terms of grievances, union 25 difficulties and, in this case, EEO complaints, Merit 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Systems Protection Board complaints, district court complaints, et cetera, et cetera. In any event, Mr. Mojarro fell into more and more trouble, and his response became a profusion of grievances and complaints, both administrative and in court. There must have been at least two dozen of these over the course of the years. By 2007 a psychiatrist declared him temporarily totally disabled. That year also marked an astonishing incident where he was escorted from the Post Office where he worked and has never returned. By 2009 he took non-disability retirement, and he hasn't been back to the Post Office as an employee since. The suits and complaints kept going, however. There was a breakthrough in January 2011, when an EEOC judge ruled that the agency, in this case the Post Office shall compensate Mr. Mojarro for nonpecuniary damages in the amount of $146,250, a remarkable outcome for somebody representing himself, of course, in this situation. That in turn, a few months later, in April of 2011, triggered a global settlement by the Post 25 Office and Mr. Mojarro, and it was that global 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 settlement -- a release of all claims in exchange for $250,000 -- that is at issue here. I want to review in some detail the terms of this global settlement, because they're important to characterizing the taxability of the settlement proceeds. The settlement specifically released "the following actions pending in the EEOC: Case Numbers 480-2007-00497X, 480-2008-26X, 480-2008-145X, 480- 2011-114X, 480-2011-374X, and 480-2011-375X, as well as Guillermo Mojarro v. USPS, Federal Circuit Number 11-3079. The release, however, was even broader than that, forever discharging "the Postal Service, its past and present respective officers, agents, and employees from any and all claims, demands, suits, rights, damages, union grievances, charges; administrative remedies, including but not limited to 19 Merit Systems Protection Board or Equal Employment 20 Opportunity Commission filings; and causes of action 21 22 23 24 25 of any and every kind, nature, and character known and unknown which Complainant may now have or has ever had against the Postal Service or any of its officers, agents, or employees which arose in whole or in part from Complainant's employment relationship 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 with the Postal Service and which are based upon 2 3 4 5 incidents, occurrences or actions taken place prior to the execution of this agreement." The only thing excluded from it were his right to continue to seek claims before the Office of 6 Workers' Compensation or for unemployment benefits. 7 Indeed, so eager was the Post Office to put Mr. 8 Mojarro behind it that the settlement agreed as well 9 that Mr. Mojarro will never return to work for the 10 11 12 13 14 15 16 17 Postal Service. "He will neither apply for nor accept re-employment with, reinstatement with, or transfer to the Postal Service. Complainant agrees that should he receive a future appointment with the Postal Service, this agreement acts as his voluntary and irrevocable resignation from that position." So it seems that from the Post Office's perspective, they were extremely eager to put Mr. 18 Mojarro behind them and were willing to pay him 19 20 21 22 23 24 $250,000 in essence to go away. This is a very, very general release, in other words. This, however, did not stop Mr. Mojarro from continuing to litigate concerning his now-former employer. He's tried to undo the settlement agreement and get more money or reinstatement rights 25 with the Post Office. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 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 Now, these have so far been unsuccessful. It continues on into this year, where last month alone he filed another complaint with the National Labor Relations Board, stipulation at 573. Well, with that as background, how should I go about analyzing both the merits of this case -- the key question of the includability of the $250,000 settlement in Mr. Mojarro's income -- and the question of a penalty. Let me start first with a question of how to characterize the $250,000. Section 61 of the Code provides that except as otherwise provided, gross income means "all income from whatever source derived." There is an exception in Section 104, and specifically 104(a)(2), which says that gross income does not include "the amount 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." The Code specifically states at the bottom of 104 "for purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness. The preceding sentence shall not 866.488.DEPO www.Capita]ReportingCompany.com Capital Reporting Company 11 1 2 3 apply to an amount of damages not in excess of the amount paid for medical care attributable to emotional distress." See also, e.g., Rivera v. Baker 4 West, 430 F.3d 1253, 1257 (Ninth Circuit, 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2005)(same). In characterizing the $250,000 settlement payment, I'll break down the seven cases that are specifically mentioned in the release and then make some more general comments. The seven cases that are specifically mentioned, whose long and involved numbers I just recited, break down into three categories: The first are the EEOC cases ending in 497X, 26X, and 145X. These cases were dealt with together at the EEOC, as one can see from the stipulation at page 45. In them the EEOC described the issue as "was the Complainant subject to harassment and the basis of reprisal for prior protected EEO activity from on or about December 6, 2006, to on or about June 14, 2007." In the description of damages on the next page, stipulation 46, the EEOC goes on to say that, "Complainant testified that the Post Office's 'unlawful harassment caused him tremendous stress, aggravating his prior condition of a temporary 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 adjustment disorder and elevating it to long-term anxiety and depressive disorders.'" One can look through that decision and see no indication that Mr. Mojarro was seeking additional compensation for his foot injury from years before. No personal physical injury was alleged. And I don't see that as even being at issue in those three EEOC cases. The second group of three cases, again, a cluster of EEOC cases ending in numbers 114X, 374X, and 375X, are likewise devoid of any mention of personal physical injuries. The first, ll4X, corresponds to the case numbered, before the Postal Service, 4F-926-0281-09, 15 Exhibit 20-P, and in it Mr. Mojarro sought "a claim 16 17 18 19 20 21 22 23 24 25 for a construction discharge denied reasonable accommodations, hostile work environment, as noted in pre-complaint counseling document reference." The damages sought were compensatory damages: front pay, back pay, lost wages and benefits. Again, there is no claim for personal physical injury in that one. Similarly, in the EEOC case that ends in 374X, there was no mention of personal physical injuries, and in the case ending 375X, there were 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 only allegations of constructive suspension by the Post Office of Mr. Mojarro. He was apparently not being allowed to return to a different worksite as a reasonable accommodation for his foot injury. But he was not seeking additional compensation for that injury. Remember at this time he was still getting treated by a podiatrist and had been for a number of years. Finally, the third cluster of cases is a single-case cluster, is the federal circuit case, 11- 3079, and that was all about reinstatement rights that Mr. Mojarro alleged he had. Again, not having anything to do with personal physical injury. I also checked the other cases that had already been dismissed by the April 2011 settlement date to see if there was anything in them. Mr. 17 Mojarro had testified that those were duplicative and 18 19 20 21 22 23 24 25 had been dismissed because of their duplication of his EEOC and federal circuit cases, and that seems to be entirely true. These were, again, all based on hostile work environment and other employment-law related claims, not claims for personal physical injury. Now, Mr. Mojarro has an important counter- argument here, and his counter-argument is based on a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 couple of things. One is the Domeny case, Tax Court Memorandum 2010-9, in which, in a way very similar to 3 Mr. Mojarro's settlement, the taxpayer involved 4 5 6 7 8 9 10 11 12 13 14 received a lump-sum payment that was not allocated in part, and it was reported on a 1099-Miscellaneous income, much as Mr. Mojarro's was. This was a portion of a much larger settlement, but this portion at least was treated as non-wage compensation, and Mr. Mojarro's was as well, so he says if Ms. Domeny got tax-free status, why shouldn't I? The distinction between the cases, though, is apparent when one reads Domeny, because the taxpayer there, Ms. Domeny, had suffered from 15 multiple sclerosis before her employment began, and 16 17 18 19 20 21 22 she testified credibly to the judge in that case that, as a result of her hostile work environment, her physical multiple sclerosis symptoms spiked; they became worse. And so this was a situation in which the hostile work environment didn't trigger the emotional injuries and extreme psychological problems that Mr. 23 Mojarro faced but instead were physical injuries that 24 25 occurred in the hostile work environment. And, again, the distinction between 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 9 personal physical injuries and the emotional injuries is a key one for determining whether income has to be excluded under Section 104. So I find that Domeny, under these circumstances, is distinct. The Court specifically said, on page 12 of its opinion in Domeny, "In summary petitioner has shown that her work environment exacerbated her existing physical illness." That's a distinction that really makes a 10 difference in terms of excludability under Section 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 104. But Mr. Mojarro has a second counter- argument to the Government's position, and that is that, but for his foot injury, he never would have descended into this morass of litigation, grievances, complaints, emotional trauma, et cetera, that were triggered when his requests for reasonable accommodation due to his foot injury were not, for a long period of time, honored by the Post Office where he was working. So he says that, "But for my foot injuries, none of this would have happened; none of these cases would have gone as far as they did. I would never have gotten the $250,000 in my April 2011 settlement." 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 The problem for his counter-argument here, however, is that the Supreme Court has said something different. In a case called O'Gilvie v. United States, 519 U.S. 79 (U.S. 1996), the Supreme Court said, "The phrase 'on account of' does not unambiguously define itself. On one linguistic interpretation of those words, that of petitioner's, they require no more than a 'but-for' connection between any damages and a lawsuit for personal injuries. They would thereby bring virtually all personal injury lawsuit damages within the scope of the provision since 'but for the personal injury, there would be no lawsuit, and but for the lawsuit, there would be no damages.' "On the Government's alternative interpretation, however, those words impose a stronger causal connection, making the provision applicable only to those personal injury lawsuit damages that were awarded by reason of or because of the personal injuries...We agree with the 21 Government's interpretation of the statute." Id., at 22 23 24 25 82-83. I have to follow the Supreme Court, so I have to reject this counter-argument. Moreover, the April 2011 settlement agreement that Mr. Mojarro signed did carve out an 866.488.DEPO www.CapitalReportingCompany.com . Capital Reporting Company 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 exception for further workers' compensation claims, and indeed he had one in litigation at about the time he reached his settlement with the Post Office, but it, too, as far as I can tell, looking at stipulation 132, related to the emotional trauma that he suffered as a result of the hostile work environment in his last few years of the Post Office. So I don't see any part of the $250,000 that was on account of personal physical injuries. There is one small exception to this. As I noted in the background section, Section 104 does allow damages not in excess of the amount paid for medical care attributable to emotional distress. And it stood out to me in reviewing the EEOC decision from January of 2011 -- remember, that's the one that was to have awarded Mr. Mojarro $146,000, and that almost certainly triggered the later global settlement that gave him $250,000. In that EEOC decision, at stipulation page 117, referring to a Dr. Ammon who had treated Mr. 21 Mojarro for his psychological problems, the EEOC 22 23 24 25 judge said that, "Dr. Ammon credibly testified that he charged complainant between $1500 and $2250 for 10 to 15 sessions of treatment beginning in June 2007 through the date of the hearing in June 2008. The 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 agency failed to impeach Dr. Ammon on this claim. 2 Accordingly, I hereby approve past pecuniary damages 3 4 5 6 7 8 9 10 11 12 13 14 15 estimated to be between $1500 and $2250, but complainant shall immediately obtain a receipt showing how much has been billed by Dr. Ammon during said period for treatment so that an exact amount can be awarded." The judge in that case also went on to approve two sessions per month for six months and one session per month for 30 months, for a total of three years of treatment, either through a lump sum payment to be negotiated between the parties and Dr. Ammon or on mutual agreement of the parties. I asked Mr. Mojarro about this, and he testified that this never came to pass. 16 Nevertheless, it seems clear from this decision that 17 18 19 20 21 there was a minimum of $1500 of the award that represented the cost of Mr. Mojarro of his past treatment by Dr. Ammon, and I think it more likely than not, as a result of that, that a small portion, at least 1500 -- but there's no proof of anything 22 more, so I will limit it to 1500 of the $250,000 -- 23 represents compensation to Mr. Mojarro for this 24 medical expense that he incurred as a result of the 25 emotional injuries that he suffered. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 2 3 4 5 So I will exclude $1500 of the $250,000 under that language in Section 104 that allows the exclusion of medical expenses actually incurred. With that exception, then, the bulk of the $250,000 did have to be included in taxable income, 6 which leads me to have to discuss the penalty issue 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 in this case. The Government, when it asserts a penalty, has the burden of production or coming forward. It has done this in this case by pointing to Section 6662(b) (2), which provides for a penalty for the substantial understatement of the income tax. As the Government points out, on his 2011 return, Mr. Mojarro reported a total tax of zero dollars. The IRS determined the tax required to be shown on the return was $72,000 plus. That will not be substantially reduced by excluding 1500 out of the $250,000. Ten percent of that sum is about $7200. The understatement of tax exceeds both 10 percent of the tax required to be shown on the return and $5,000, so the Government has met its burden of production on the penalty issue. Nevertheless, Section 6664(c)(1) provides 25 that the Section 6662 penalty does not apply to any 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 6 7 8 portion of an underpayment if reasonable cause existed and a taxpayer acted in good faith. The question of whether a taxpayer has acted with reasonable cause and good faith is made by taking into account all pertinent facts and circumstances. This is an interesting question here, because Mr. Mojarro was clearly aware that there 9 might have been tax consequences related to his 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 receipt of the award back in 2011. The settlement agreement, after all, stated that the Post Office would file a Form 1099-MISC with the IRS and stated that there may be tax consequences on account of that filing. Mr. Mojarro also made a disclosure on his 2011 return that stated, "Please note in 2011 the US Postal Service" -- payor's federal ID number redacted -- "paid Guillermo Mojarro $250,000 in non- wage compensation related to his claims which included Guillermo Mojarro's on-the-job physical injury claims. Guillermo Mojarro is still in litigation with the US Postal Service and must return the money, $250,000, to the US Postal Service. "Through the litigation the US Postal Service must make Guillermo whole in all respects, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company which should provide for the tax consequences, if any. Litigation with the USPS is ongoing. As soon as it is resolved, Guillermo Mojarro will contact the 21 IRS." This presents a defense of reasonable cause and good faith, and the question I have to ask is 1 2 3 4 5 6 7 whether this was a reasonable position for Mr. 8 Mojarro to take and whether he took it in good faith. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 I looked first at the date that he filed his return, which was September 2012. He had an extension, so this is a timely filed return. But it was interesting to me that he had at that time another litigation pending against the Post Office. In that case he had attempted to overturn the settlement agreement, which would, as he said, cause him to have to return the $250,000 and, in exchange, give him the right to sue for a million dollars of compensation or the ability to return to his Postal Service job. But as the Merit Systems Protection Board held on April 12 of 2014 -- see stipulation at 56, et seg. -- "One week after the administrative judge issued the initial decision in this appeal, the US 24 Court of Appeals for the Federal Circuit issued a 25 November 4, 2011, order remanding the petitions in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 22 1 2 two of the appellant's other appeals to the Board for assessment of the appellant's arguments that the 3 April 14, 2011, settlement agreement should not be 4 enforced...Less than two weeks later, the EEOC's 5 Office of Federal Operations issued a November 15, 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2011, decision in an appeal filed by the appellant, alleging that the April 14, 2011, settlement agreement should be deemed illegal, invalid, and unenforceable. Mojarro v. USPS, MSPB Docket Number SF-752-09-694-M-1. In its decision, the OFO rejected appellant's arguments and found the agreement 'valid and enforceable.'" Now, I recognize that there is a motion for reconsideration pending, but what this tells me is that Mr. Mojarro already knew that his hope of getting out of the settlement agreement and undoing it, which might have triggered a requirement that he return the $250,000, was already forlorn. He was certainly not, as he said on the tax return, in a position where he "must return the money, $250,000, to the US Postal Service." And after all, none of the settled litigation sought any additional compensation for personal injury beyond what Mr. Mojarro had initially sought and won back when his feet first rendered him 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 23 1 2 3 4 5 6 7 8 9 in part disabled. I therefore have to conclude that it was not a reasonable position for him to take to not include the $250,000 in his taxable income for 2011. And because of this pending litigation to upset that settlement and it's already-resolved status at the point he filed his return, I can't see good faith here either. In conclusion, therefore I sustain the 10 Government's penalty on the somewhat smaller amount that has to be included in Mr. Mojarro's taxable income for 2011. Decision will have to be entered, however, under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 12:21 a.m., the above- entitled matter was concluded.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com