TAX COURT OPINION

Case: Michael & Julie Enright
Docket Number: 27955-08
Judge: Colvin
Opinion Type: bench
Filed: 05/20/2010
Pages: 10

UNITED STATES TAX COURT WASHINGTON, D.C. 2021 7 MICHAEL & JULIE ENRIGHT, Petitioners , v . ) Docket No . 27955-08 COMMISSIONER OF INTERNAL REVENUE , Respondent . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and (Procedure, it i s ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of the pages of the transcript of the proceedings of the above case before Judge Diane L . Kroupa at Los Angeles, California, on January 28, 2010, containing her oral findings of fact and opinion . In accordance with the oral findings of fact and opinion, decision will be entered for respondent regarding the deficiency ,but for petitioner as to the accuracy-related penalty based on respondent's concession . jDate : Washington, D .C . May 20, 2010 (Signed) Diane L . Kroupa Judge SERVED MAY 2 8 2010 3 1 Bench Opinion by Judge Diane L . Kroupa 2 January 28, 201 0 3 MICHAEL & JULIE ENRIGHT V . COMMISSIONER 4 Docket No . 27955-0 8 5 BENCH OPINION 6 THE COURT HAS DECIDED TO RENDER ORA L 7 FINDINGS OF FACT AND OPINION IN THIS CASE AND THE 8 FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT 9 AND OPINION . THE ORAL FINDINGS OF FACT AND OPINION 10 SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER 11 CASE . 12 This bench opinion is made pursuant to the 13 authority granted by section 7459(b) and Rule 152 . 14 All section references are to the Internal Revenue 15 Code for 2006, the year at issue, and all Rul e 16 references are to the Tax Court Rules of Practice and 17 Procedure . 18 Robert Ball (specially recognized) appeared 19 on behalf of petitioners . Jeffrey Belcher appeared on 20 behalf of respondent . 21 Respondent determined a $16,421 deficiency 22 in petitioners' Federal income tax for 2006 and a 23 $3,151 accuracy-related penalty under section 6662(a) . 24 Respondent has conceded the penalty so the only issue 25 for decision is whether the $57,500 amount tha t Heritage Reporting Corporation (202) 628-4888 4 1 petitioner received from her former employer i n 2 settlement of a lawsuit is excludable from her gross 3 income under section 104(a)(2) . We hold that it is 4 l not . 5 FINDINGS OF FAC T 6 Petitioners resided in California at th e 7 time they filed the petition in this case . Petitioner 8 Julie Enright shall be referred to individually as the 9 petitioner . 10 Background 11 Petitioner worked as a sales associate for 12 Computer Associates, Inc . (CAI), a successor entity 13 that had acquired petitioner's earlier employer , 14 Sterling Software . Petitioner began working at 15 Sterling in 1998 . At one point while at Sterling, 16 petitioner reported an earlier indiscretion with a 17 Sterling employee from the UK . The human resource 18 person apparently told petitioner that "Boys will be 19 boys . " 20 In 2005, petitioner claimed that her male 21 regional manager made lewd remarks referencing her 22 anatomy while attending a dinner with several fellow 23 employees . Petitioner left the dinner table because 24 of the behavior and went to the restroom where she 25 experienced dry heaves and cried . Heritage Reporting Corporation (202) 628-4888 5 1 Petitioner thereafter reported the incident 2 to CAI's human resources department . Petitione r 3 reported the lewd remarks and never mentioned an y 4 touching . She did not report any touching because of 5 the employer's handling of the earlier episode an d 6 because she did not want her husband to know . 7 Petitioner was subsequently fired . 8 Lawsuit and Settlemen t 9 Petitioner retained an attorney to represent 10 her after CAI terminated her employment . Petitioner 11 filed a First Amended Complaint for Damages agains t 12 CAI in the California Superior Court, Los Angele s 13 County (Central District) (Case No . BC325566) alleging 14 wrongful termination, retaliation, sexual harassment, 15 and intentional infliction of emotional distress . The 16 complaint concerned only the remarks made by he r 17 regional manager . Petitioner further testified during 18 depositions that the only incidents of sexua l 19 harassment her regional manager committed against her 20 were those alleged in the complaint . 21 Petitioner and CAI were able to negotiate a 22 settlement to end the lawsuit . They each signed a 23 Settlement Agreement and General Release (Settlement 24 Agreement) in which CAI agreed to pay petitioner the 25 settlement amount . Petitioner agreed to othe r Heritage Reporting Corporation (202) 628-4888 6 1 standard boiler plate language including a 2 confidentiality clause and a general release of claims 3 clause . 4 Settlement Payment and Petitioner's Tax Retur n 5 CAI issued petitioner a Form 1099-MISC , 6 Miscellaneous Income, to report the settlement amount 7 petitioner received from her former employer . 8 Petitioner paid her attorney over half of the award 9 (or $30,821 .13) of the amount received from CAI . .10 Petitioners filed their joint Federal income ta x 11 return for 2006 but failed to report any of the 12 settlement amount as taxable . Petitioners did , 13 however, attach a document to their return disclosing 14 that the entire settlement amount was nontaxable . 15 Respondent selected petitioners' return for 16 2006 for examination and issued petitioners th e 17 deficiency notice . 18 Petitioners now allege there was a n 19 additional undisclosed action in addition to the four 20 causes of action petitioner raised in the complain t 21 against CAI . This secret, undisclosed cause of action 22 was that her regional manager had grabbed her buttocks 23 causing an abrasion, which she treated with ointment . 24 Petitioner now asserts she would have amended her 25 complaint to include sexual battery had she not Heritage Reporting Corporatio n (202) 628-4888 7 1 reached the settlement with CAI . 2 Discussio n 3 We are asked to decide whether any portion 4 of the amount that petitioner received in settlemen t 5 8 of her lawsuit against her former employer is excludable or taxable . Respondent argues that petitioner must include the entire amount she receive d from her former employer . Petitioner conversely argues that the entire amount is excludable . . We begin 10 with the general rules of taxability and limited rules 11 of excludability . 12 Gross income is broadly defined to mean "all 13 income from whatever source derived" except a s 14 otherwise provided . Sec . 61(a) . Section 104(a)(2) 15 excludes from gross income "the amount of any damages 16 (other than punitive damages) received (whether by '17 suit or agreement and whether as lump sums or a s 18 periodic payments) on account of personal physical 19 injuries or physical sickness ." The term "damages 20 received" means any amount received "throug h 21 prosecution of a legal suit or action based upon tort 22 or tort type rights, or through a settlement agreement 23 entered into in lieu of such prosecution ." Sec . 24 1 .104-1(c), Income Tax Regs . The flush language of 25 section 104(a) further provides that "emotional Heritage Reporting Corporatio n (202) 628-4888 8 1 distress shall not be treated as a physical injury or 2 physical sickness " for purposes of section 104(a)(2) . 3 "[T]he term emotional distress includes symptom s 4 (e .g ., insomnia, headaches, stomach disorders) which 5 may result from such emotional distress ." H . Conf . 6 Rept . 104-737, at 301 n . 56 (1996), 1996-3 C .B . 741, 7 1041 . 8 We now must focus on whether any amount that 9 petitioner received from her former employer was o n 10 account of any physical injury or physical sickness . 11 Petitioner must satisfy two requirements to exclude 12 the settlement amount from income under sectio n 13 104(a)(2) . She must prove first that the underlying 14 cause of action giving rise to her recovery of the 15 payment is based upon tort or tort type rights, and 16 second that the payment was received on account o f 17 personal physical injuries or physical sickness . See 18 Commissioner v . Schleier , 515 U .S . 323, 328 (1995) ; 19 see also Sec . 104(a)(2) ; Sec . 1 .104-1(c), Income Tax 20 Regs . 21 We find petitioner meets the first prong, 22 having brought a tort type action against her former 23 employer . We then turn to whether the settlemen t 24 amount from her former employer was received on 25 account of a personal physical injury or physical Heritage Reporting Corporatio n (202) 628-4888 9 1 sickness . 2 When damages are received pursuant to a 3 settlement agreement, as here, the nature of the claim 4 that was the actual basis for settlement, not th e 5 validity of that claim, controls whether the amounts 6 are excludable under section 104(a)(2) . See Bagley v . 7 8 Commissioner , 105 T .C . 396, 406 (1995), affd . 121 F .3 d 393 (8th Cir . 1997) . Determining the nature of the claim is a factual inquiry that is generally made b y 10 reference to the settlement agreement . Robinson v . 11 Commissioner , 102 T .C . 116, 126 (1994) (and cases 12 cited thereat), afd . in part and revd . in part on 13 another ground 70 F .3d 34 (5th Cir . 1995) . If the 14 settlement agreement lacks express language stating 15 what the settlement amount was paid to settle, we 16 determine the intent of the payor by considering all 17 the facts and circumstances of the case, including the 18 complaint filed and details surrounding th e 19 litigation . Knuckles v . Commissioner , 349 F .2d 610, 20 613 (10th Cir . 1965), affg . T .C . Memo . 1964-33 ; 21 Robinson v . Commissioner , supra at 127 . 22 We therefore look to the settlemen t 23 agreement to examine the nature of the claim . The 24 settlement agreement does not allocate any part of the 25 settlement payment to a personal physical injury or Heritage Reporting Corporatio n (202) 628-4888 11 10 1 physical sickness . Indeed, there is no reference to a 2 physical injury or physical sickness resulting from 3 CAI's actions, nor does the settlement agreemen t 4 specifically carve out any portion of the settlement 5 payment as a settlement on account of persona l 6 physical injury or physical sickness . 7 Petitioner recognizes that physica l 8 manifestations are not enough . Petitioner seeks to b e a "Monday morning quarterback" in asserting the 10 physical injury claim after the settlement had been 11 reached . Petitioner's complaint did not include any 12 facts concerning physical injury or sickness caused by 13 her regional manager or any other employee of CAI . 14 The express terms of the settlement agreement do not 15 include any reference to any physical injury o r 16 sickness to petitioner from the incident . This is not 17 surprising . There is testimony and documentar y 18 evidence that petitioner never mentioned the touching 19 to anyone at CAI . The record also reflects tha t 20 neither petitioner nor her attorney ever disclosed the 21 touching to CAI because the lawsuit was settled before 22 they raised the touching incident . It is axiomatic 23 that CAI could not have intended to pay petitioner for 24 a physical injury if it never knew of any allege d 25 touching . Heritage Reporting Corporation (202) 628-4888 1 1 1 We conclude that no portion of th e 2 settlement amount was received on account of an y 3 physical injury or physical sickness . Accordingly, 4 the entire settlement amount is not excludable under 5 section 104(a)(2) . 6 To reflect the foregoing, decision will be 7 entered for respondent regarding the deficiency but 8 for petitioner as to the accuracy-related penalty 9 based on respondent's concession . 10 THIS CONCLUDES THE COURT'S ORAL FINDINGS OF 11 FACT AND OPINION IN THIS CASE . 12 (Whereupon at 9 :08 a .m ., the bench opinion 13 in the above-entitled matter was concluded . ) 14 15 16 17 / / 18 // 19 20 21 2 2 23 24 // 25 Heritage Reporting Corporation (202) 628-4888