TAX COURT OPINION

Case: Corry C. Wright
Docket Number: 8744-15S
Judge: Carluzzo
Opinion Type: bench
Filed: 05/05/2016
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 CORRY C. WRIGHT, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent. SD ) ) ) ) ) Docket No. 8744-15S ) ) ) ) ) ORDER 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 Special Trial Judge Lewis R. Carluzzo at Philadelphia, Pennsylvania, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. May 5, 2016 SERVED May 06 2016 Capital Reporting Company 1 Bench Opinion by Special Trial Judge Lewis Carluzzo 3 2 April 21, 2016 3 Corry C. Wright v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Docket No. 8744-15S THE COURT: 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 (bench opinion). Unless otherwise noted, section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for the relevant periods, and Rule references are to the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by Section 7459(b) and Rule 152. This proceeding for the redetermination of a deficiency is a small tax case subject to the provisions of Section 7463 and Rules 170 through 175. Pursuant to Section 7463(b), the decision entered in this case shall not be treated as precedent for any other case. Corry C. Wright appeared on his own behalf. 23 Gary Mer.ken and John Guarnieri appeared on behalf of 24 25 the respondent. In a notice of deficiency dated December 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 29, 2014 (notice), respondent determined a $5,653 deficiency in petitioner's 2012 federal income tax and imposed a $1,131 I.R.C. Section 6662(a) accuracy- related penalty. The issues for decision are: (1) whether petitioner may exclude from income a lump sum payment he received during the year in issue upon the involuntary termination of his employment with the 9 University of Delaware (University); and (2) whether 10 11 12 13 14 15 16 17 18 19 20 21 22 23 petitioner is liable for the penalty. Some of the facts are found on the basis of deemed admissions to respondent's request for admissions, filed February 2, 2016, as reviewed by the Court at the beginning of the trial. At the time the petition was filed, petitioner lived in Delaware. Petitioner began working part-time as a research assistant for the University in 2009. His position was converted to a full-time/permanent position in 2010, which required a criminal background check. For reasons not fully set forth in the record, petitioner's criminal background check caused University to terminate his employment as of the close of 2010. Believing that at least one other 24 University employee with a similar criminal history 25 but different ethnic background was not terminated, 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 petitioner attributed his termination not to his criminal record, but to racial discrimination. On June 9, 2011, petitioner signed a formal charge of discrimination against University for "discrimination based upon race" (claim). The claim apparently was resolved through mediation by a settlement agreement and release (release) signed by petitioner and University on March 20, 2012. 9 According to the release, upon the payment of $20,000 10 11 12 13 14 15 to petitioner, he agreed to "knowingly and willingly remise, waive, release and discharge" University "of and from any and all manner of actions, causes of actions, suits, debts, dues, accounts, bonds, covenants, contracts, agreements, judgments, claims and demands" that petitioner has or may have against 16 University, "including any claims that were or could 17 18 19 20 21 22 23 24 25 have been brought in the claim". The $20,000 payment referenced in the release was paid to, and received by petitioner during 2012 (settlement payment). Petitioner's 2012 federal income tax return was prepared by a volunteer through an income tax return preparation organization. Petitioner discussed the settlement payment with the return preparer, but the settlement payment is neither included in the income reported on petitioner's 2012 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 return nor otherwise disclosed on that return. In the notice, respondent determined that the settlement payment is includable in petitioner's 2012 income and adjusted petitioner's income accordingly. Adjustments to credits claimed on 6 petitioner's 2012 return are also included in the 7 8 9 computation of the deficiency here in dispute. The parties proceeded as though the adjustments to the credits are computational, and they very well might 10 be. Nevertheless, at the conclusion of trial, the 11 Court suggested that the parties give those credit 12 13 14 15 16 17 18 19 adjustments a second look, and we turn our attention to the settlement payment. Respondent's determination that the settlement payment is includable in petitioner's income having been made in a notice of deficiency is presumptively correct, and petitioner bears the burden of proof to establish that respondent's determination is erroneous. Rule 142(a); Welch v. 20 Helvering, 290 U.S. 111, 115 (1933). 21 22 In general, unless specifically exempted or excluded, gross income includes all income from 23 whatever source derived. Sec. 61(a); Commissioner v. 24 25 Glenshaw Glass Co., 348 U.S. 426 (1955). According to petitioner, Section 104(a)(2) provides the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 relevant exclusion. That section provides that damages, other than punitive damages, received, 3 whether by suit or agreement, are not included in the 7 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 recipient taxpayer's income if the damages "are on account of personal physical injuries or physical sickness". The term "damages" means "an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort-type rights, or through a settlement agreement entered into in lieu of such prosecution." Sec. 1.104-1(c), Income Tax Regs. Whether a settlement payment or recovery may be excluded under Section 104(a)(2) depends on the nature of the claim settled or litigated. Glynn v. Commissioner, 76 T.C. 116, 119 (1981), aff'd without published opinion, 676 F.2d 682 (1st Cir. 1982). In order to exclude a settlement or a recovery, a taxpayer must demonstrate (1) that the underlying cause of action giving rise to the settlement or recovery is based upon tort or tort-type rights and (2) that the damages were received on account of personal injuries or sickness. Commissioner v. Schleier, 515 U.S. 323 (1995). As we have noted in many cases involving similar issues, exclusions from income must be narrowly construed. See id. 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 8 1 2 3 During his cross-examination at trial, petitioner was asked whether he suffered any physical injuries or physical sicknesses as a result of 4 University's actions. He was reluctant to respond to 5 the question without first being provided with a 6 definition of the word "physical". We think the word 7 8 9 10 11 12 as used in the statute is clear enough, and taking into account petitioner's presentation as a whole, we suspect that he is familiar with its meaning as well. According to petitioner, he did suffer physical injuries and/or physical sickness because the action giving rise to his complaint against 13 University had a negative impact on his entire being. 14 15 16 17 18 We understand that the sudden loss of an individual's job and source of income would be unsettling to the individual, and petitioner was no doubt distressed as a result of losing his job with University under circumstances that he considers to be discriminatory. 19 Nevertheless, petitioner's reference to injuries to 20 21 22 his "entire being" would seem to transcend the physical, and the suffering he experienced and described as a result of his discharge from 23 University would seem better described as emotional 24 25 distress rather than physical injury. If, as here, there is no showing of any expenses incurred for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 medical treatment for emotional distress, damages 2 3 4 5 6 7 8 received on account of such injuries are not covered by Section 104(a)(2). See Sec. 104(a) (last two sentences). Furthermore, neither the claim nor the release makes any reference to any physical injuries or physical sickness suffered by petitioner as a result of his discharge from University. 9 Petitioner's contention that the settlement payment 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 was intended to compensate him for a physical injury or physical sickness is undermined by his failure to allege, much less establish, that he incurred any expenses for medical treatment for any such physical injury or physical sickness. Simply put, the evidence in this case could not support a finding that the settlement payment fits within the definition of "damages" as that term is used in Section 104(a)(2). Otherwise, the settlement payment was an accretion to petitioner's wealth, see Commission v. Glenshaw Glass Co., 3438 U.S. 426, and fits within the definition of income under Section 61. As noted, Section 104(a)(2) does not allow for the exclusion of this income, and we are aware of no other provision 25 of the Internal Revenue Code or principle that does. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 It follows that the settlement payment is includable in petitioner's 2012 income, and respondent's determination to that end is sustained. In the notice, respondent also determined that petitioner is liable for an accuracy-related penalty because the underpayment of tax required to be shown on his 2012 return is a substantial understatement of income tax. See Sec. 6662(a), (b) (2),(d). Although simple math shows that respondent's burden with respect to the imposition of the penalty has been satisfied, see Sec. 7491(c), for the following reason, we find that petitioner is not liable for the penalty. Petitioner discussed the settlement payment 15 with his return preparer and was advised that it was 16 17 18 19 20 up to him (petitioner) to decide whether the payment should be included in the income reported on that return. Petitioner obviously decided that it should not for the reasons he explained at trial. We find his reliance upon Section 104(a)(2), although 21 misplaced, was reasonable and that his decision to 22 23 24 25 exclude the payment was made in good faith. See Sec. 6664(c). To reflect the foregoing, and to allow the parties to address (1) the potential premature 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 assessment identified during trial, and (2) the credits disallowed in the notice, decision will be entered under Rule 155. This concludes the Court's bench opinion in this matter. (Whereupon, at 10:06 a.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 25 866.488.DEPO www.CapitalReportingCompany.com