TAX COURT OPINION

Case: David Leigh Bryant
Docket Number: 10820-06
Judge: Colvin
Opinion Type: bench
Filed: 02/02/2009
Pages: 10

L ADM . RECORDED SERVICE CAL . Li STAT . JUDGE 01 FILES UNITED STATES TAX COURT WASHINGTON , D .C . 2021 7 DAVID LEIGH BRYANT , Petitioner, ) Docket No . 10820-0 6 V . COMMISSIONER OF INTERNAL REVENUE , Respondent, O R D E R 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 petitioners and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Diane L . Kroupa at San Francisco, California on September 26, 2008, containing her oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, decisions will be entered for petitioner . (Signed) Diane L. Kroupa Judge Dated : Washington, D .C . February 2, 2009 SERVED FEB 0.3 2009 2 1 P R O C E E D I N G S 2 (11 :03 a .m .) 3 Bench Opinion by Judge Diane L . Kroupa September 26, 2008 4 David Leigh Bryant v . Commissioner Docket No . 10820-06 5 THE CLERK : All rise . 6 Please be seated . 7 Docket No . 10820-06, David Leigh Bryan t 8 THE COURT : The Court has decided to render ora l 9 findings of fact and opinion in this case, and the following 10 represents the Court's oral findings of fact and opinion . 11 These oral findings of fact and opinion shall not be relied 12 upon as precedent in any other case . 13 This bench opinion is made pursuant to th e 14 authority granted by section 7459(b) of the Internal Revenue 15 Code, and Rule 152 of the Tax Court Rules of Practice & 16 Procedure . . All section references are to the Interna l 17 Revenue Code for the years 1989 through and including 1993, 18 which years shall. be referred to as the years at issue, and 19 all rule references are to the Tax Court Rules of Practice & 20 Procedure . 21 . David Bryant appeared pro se, and Jeremy McPherson 22 appeared on behalf of Respondent . 23 This is a deficiency case in which Responden t 24 determined that Petitioner erroneously excluded settlement 25 proceeds under section 104 . Respondent also determined that Heritage Reporting Corporatio n (202) 628-4888 3 1 Petitioner failed to timely file a return under sectio n 2 6651(a)(1) and failed to make estimated tax payments under 3 section 6654 for each of the years at issue . 4 After issuing the deficiency notice, Responden t 5 made concessions that a substantial amount of the settlement 6 proceeds were excludable from Petitioner's gross income 7 under section 104, and that Petitioner is not liable for the 8 deficiency and additions to tax for one of the five years at 9 issue . We find that the rest of the settlement proceed s 10 were likewise excludable from Petitioner's gross incom e 11 under section 104 and that Petitioner is not liable for the 12 late-filing additions or estimated-tax additions for the 13 remaining years at issue . 14 FINDINGS OF FAC T 15 Certain facts have been stipulated . The 16 stipulation of facts with accompanying exhibits i s 17 incorporated by this reference . The facts are so found . 18 Petitioner resided in California at the time he 19 filed the petition in this case . Petitioner was in the real 20 estate business in the early 1980s . Petitioner formed and 21 participated in several groups of partnerships, including 22 Northcon I through XI and XV, and Hillshire Trust I, II, X, 23 XI, XII, and XV . 24 Petitioner, Dan Izumi, and Bob Steele were 25 principal partners in these partnerships . These Heritage Reporting Corporatio n (202) 628-4888 4 1 partnerships entered into partnership agreements with other 2 groups of partnerships to develop properties . Thes e 3 partnerships included Sacore Partnerships I through V, and 4 Highlands Partnership I . 5 Disagreements arose between the partnerships . 6 Allegations were that Petitioner's partners were stealing a 7 certain percentage of payroll on over $250 million o f 8 construction contracts . In 1984 Petitioner and the Northcon 9 Partnership sued Baugh Construction Company in the first of 10 approximately 32 separate cases in the California Superior 11 Court, the Sacramento Superior Court, Oregon courts , .12 Clackamas County Circuit Courts, and various other federa l a 13 and state courts concerning a multitude of torts . 14 These tort actions include bad faith, fraud , 15 breaches of fiduciary duty, implied covenant of good faith 16 and fair dealing, negligent infliction of emotiona l 17 distress, as well as contract issues . Language in one o f 18 the complaints alleged that Petitioner has suffered general c 0 19 personal injury including . . . occurrences of humiliation and 20 severe nervous and emotional distress including physica l 21 manifestations of such distress, and physical injury"/ . 22 Many additional lawsuits followed with cross- 23 claims against partners and investors . Cross-complaint s 24 were filed against insurance companies who had underwritten 25 Baugh Construction Company . Petitioner also sued banks and Heritage Reporting Corporatio n (202) 628-4888 5 1 investors concerning loans and he sued attorneys fo r 2 malpractice . Petitioner was involved in more than 200 3 lawsuits . 4 During this massive litigation , Petitioner and his 5 family lost their family home , causing humiliation an d 6 severe nervous and emotional distress . Petitioner settled 7 with some of the litigants . In late 1988 the insure r 8 stopped defending Petitioner and other alleged tort/feasors .0 9 Petitioner filed cross - claims and actions against th e 10 insurers for various tortious acts including bad faith , 11 seeking damages for personal injuries . 12 The terms of the settlement agreements were kept 13 secret because of the continuing litigation . Responden t 14 obtained copies of the settlement agreements, which provide 15 the basis of Respondent determining in the deficiency notice 16 that Petitioner failed to include the settlement awards in 17 income . 18 Respondent began examining Petitioner returns , 19 Petitioner records, in 1996, to determine whether Petitioner 20 was required to file income tax returns for the years a t 21 issue . After a three-year lapse in activity, Petitioner 22 destroyed litigation documents that filled a 40-yar d 23 dumpster and half-filled a 20-yard dumpster . As we stated 24 earlier, Respondent conceded that Petitioner was entitled to 25 exclude a substantial amount of the settlement awards, based Heritage Reporting Corporatio n (202) 628-4888 6 1 upon the complaints and other documents Respondent had that 2 established Petitioner received the settlement amounts for 3 personal injuries . 4 Respondent argues that Petitioner is not entitled 5 to exclude the remaining amount of settlement awards because 6 Petitioner has destroyed the documents necessary t o 7 establish that they, too, were for personal injuries, after 8 waiting more than three years during audit . - 9 OPINION 10 We are asked to decide whether Petitioner may 11 exclude the additional amount of settlement proceeds from 12 gross income . We begin with the general rule o f 13 includability . Section 61(a) provides that "gross income -b, 14 means all income from whatever source derived,{ except a s 15 otherwise provided . 16 Section 104(a)(2) excludes from gross income the 17 amount of any damages whether by suit or agreement an d 18 whether as lump sums or as periodic payments on account of 19 personal injuries or sickness . ' 20 The 1996 amendment made to section 104 to narrow 21 the exclusion for personal injury damages to physica l 22 damages does not apply because the amendments are effective 23 for amounts received after August 20, 1996, which is before 24 (sic) the years at issue . Small Business Job Protection Act 25 of 1996, Pub . Law 104-188, sec . 1605, 110 Stat . 1838 . Heritage Reporting Corporation (202) 628-4888 ,l ea cu 7 1 The term "damages' means an .amount receive d 2 through prosecution of a legal suit or action based upon 3 tort or tort-type rights or through a settlement agreement 4 entered into in lieu of such prosecution .1' Sec . 1 .104-1i, 5 Income Tax Regs. ~c 7 6 For the damages to be excludable under thi s 7 provision, however, the underlying cause of action must be 8 based in tort or tort-type . rights, and the proceeds must be 9 damages received on account of personal injury or sickness . 10 Commissioner v . Schleier , 515 UAS,323, 337 (1995) . 11 Where amounts are received pursuant to a 12 settlement agreement, as here, the nature of the clai m 13 underlying the damage award rather than the validity of the 14 claim determines whether damages are excluded under section 15 104(a)(2) . See United States v . Burke , 504 US 229, 23 7 16 (1992) . 17 The nature of the claim is generally ascertained 18 by considering the facts and circumstances surrounding the 19 settlement agreement . Knoll v . Commissioner , T .C . Memo 2003-' 20 277 . 21 If the settlement agreement lacks express language 22 stating what the settlement amount was paid to settle, w e 23 determine the intent of the payor by considering all th e 24 facts and circumstances of the case including the complaint 25 filed and the details surrounding the litigation . Knuckles Heritage Reporting Corporatio n (202) 628-488 8 8 1 v . Commissioner , 349 Fed .2d 610, 613 (10th Cir . 1965 affg . 2 T .C . Memo 1964-33 ; Robinson v Commissioner , 102 T .C . 116 , 3 127 (1994) and cases cited thereat, affd . in part and revd . 4 in part on another ground 70 F .3d 34 (5th Cir . 1995) . 5 Petitioner maintains that the predominant claim in 6 the massive litigation was a tort or tort-like claim . W e 7 agree . In addition, Respondent must have agreed the same as 8 to the amounts and year Respondent conceded . We furthe r 9 find that Petitioner suffered serious nervous and emotional 10 distress as a result of learning that his longstandin g .11 business partners were stealing from the various business ',12 entities, that Petitioner and his family subsequently lost 13 their family home, and that the insurers did an about-face ,14 and changed their defense tactics . .15 Considering all the facts and circumstances i n 16 this case, we conclude that the remaining settlement amounts 17 at issue were paid for personal injuries or sickness and are 18 therefore excludable from gross income under sectio n 19 104(a)(2) . 20 We are not going to fault Petitioner for tossing 21 the documents after such a long period of inactivity from 22 the IRS . We found Petitioner credible regarding th e 23 settlement awards but have serious reservations that he only 24 received non-taxable income and was not required to file a 25 return . It is highly suspect that any taxpayer woul d Heritage Reporting Corporation (202) 628-4888 9 1 receive only nontaxable income, especially if high legal 2 fees were involved, as here . 3 We are also concerned that creating the numerous 4 trusts and entities Petitioner created may have been for tax 5 avoidance purposes . We will take Petitioner for his wor d 6 this time and hope that he is current with his current, with 7 his filing and payment obligations . 8 We also note that the record is devoid of any 9 other taxable amounts that Petitioner may have received 10 during the years at issue . Thus, we conclude tha t 11 Petitioner was not required to file a tax return for any of 12 the remaining years at issue . 13 . It therefore follows that Petitioner is not liable 14 for the late-filing addition under section 6651(a)(1) or the 15 estimated-tax addition under section 6654 for any of th e 16 remaining years at issue . 17 To reflect the foregoing, decision will be entered 18 for Petitioner . This concludes the Court's oral findings of 19 fact and opinion in this case . 20 Court is adjourned . 21 THE CLERK : All rise . 22 (Whereupon, at 11 :16 a .m ., the bench opinion in 23 the above-entitled matter was concluded . ) 24 25 Heritage Reporting Corporation (202) 628-4888 Certificate of Transcriber and Proofreader 1 0 CASE NAME : David Leigh Bryant v . Commissioner DOCKET NO . : 10820-0 6 We, the undersigned, do hereby certify that the foregoing pages, numbered 1 through 9, inclusive, are the true, accurate and complete transcript prepared from the tape made by electronic recording by Kent Andrews, on September 26, 2008, before the United States Tax Court at its session in San Francisco, California, in accordance with the applicable provisions of the current verbatim reporting contract of the Court, and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording . Date : LL KENT ANDREWS Transcribe r Date : L1 Proofreade r Heritage Reporting Corporation (202) 628-4888