TAX COURT OPINION

Case: Emblez Longoria
Docket Number: 26989-07
Judge: Gustafson
Opinion Type: memo
Filed: 07/02/2009
Pages: 31

T .C . Memo . 2009-16 2 UNITED STATES TAX C(UR T EMBLEZ LONGORIA, . Petiti ner v . COMMISSIONER OF INTERNAL REVEN E, Responden t Docket No . 26989-07 . F 1 led July 2, 2009 . Beginning in 1988 P suffered d workplace, .the apparent results of physical injuries as late as 1998 . employer in State court alleging di his complaint did not mention the p In 2005 P received a lump-sum-award the lawsuit, -and the settlement agr portion of the award to physical in advice of a certified public accoun reported this settlement award on h income tax return as non-taxable in I .R .C . sec . 104(a)(2) . R determine P's Federal income tax for 2005 and penalty under I .R .C . sec . 6662(a) o settlement award was not properly e income under I .R .C . sec . 104(a)(2) . Court for redetermination of the de related penalty . P scrimination in his hich included some In 2002 P sued his crimination, but ysical injuries . in settlement of ement allocated no uries . On the ant (C .P .A .), s 2005 Federal ome pursuant to P a deficiency in an accuracy-relate d the basis that the cludable from gross P petitioned this iciency and th e Held : P's settlement award is gross income under I .R .C . sec . 104( not excludable from )(2), because P SERVED JUL - 2 2009 failed to prove that the settlement award, or any part thereof, was received on account of personal physical injuries or physical sickness . Held , further , P is not liable for the I .R .C . sec . 6662(a) accuracy-related penalty because P reasonably and in good faith relied on the advice of a C .P .A . in reporting the settlement award as non-taxable income . Joseph'M . Pinto , for petitioner . Gary-J;. Merken , for respondent . t d MEMORANDUM FINDINGS OF FACT AND OPINIO N r GUSTA5SON, Judge : The Internal Revenue Service (IRS ) determined a deficiency of $50,066 in, and an accuracy-relate d penalty under section 6662(a)1 of $10,013 on, petitioner Emblez Longoria's Federal income tax for 2005 . The issues for decision are : (1) whether the $156,667 Mr . Longoria received from the State of New Jersey in 2.005 to settle a lawsuit is excludable from his gross income under section 104(a)(2) ; and (2) whether Mr . Longoria is liable for an accuracy-related penalty under section 6662(a) . For the reasons set forth below, we hold that (1) the $156,667 proceeds of the lawsuit settlement was not properly excludable from Mr . Longoria's gross income unde r 'Unless otherwise indicated, all citations of sections refer to the Internal Revenue Code of 1986 (26 U .S .C .), as amended, and all citations of Rules refer to the Tax Court Rules of Practice and Procedure . F ; t 3 - section 104(a)(2) ; but (2) Mr . Longoria is not liable for an accuracy-related penalty under section 6662(a) . FINDINGS OF FAC T This case was tried in Philadelphia, Pennsylvania, on February 24-25, 2009 . The stipulation o, facts . filed February 24, 2009, and the attached exhibits are ncorporated herein by this reference . At the time Mr . Longori filed his petition, he resided in Pennsylvania . History of Discriminatory Practices b t e New Jersey State Polic e For decades the New Jersey State Po ice has been accused of discriminatory practices . In 1975 .the U S . Department of Justice (DOJ) filed a lawsuit against the New Je sey State Police under the Civil Rights Act of 1964 and the Equ 1 Opportunity Act of 1972, alleging that the New Jersey State Police overlooked qualified minority and female applicants for employment . As a result of the DOJ's lawsuit, the New Jersey State Police agreed in 1975 to a Consent Decree and Order to increase the number of African-American and Hispanic troopers t 14 percent of the police force within 5 years . After 1975 three consent decrees were entered between the New Jersey Stat Police and the DOJ . The decrees mandated that the DOJ supervise the New Jersey State Police until 1992 to help ensure efforts to increase the percentage of minority and female troope s to a level consistent with that of the diverse population of N Ow Jersey . - 4 - The,1975 consent decree was dissolved in October 1992 . At the time of the termination, the New Jersey State Police, had failed to meet the mandate of that decree . In July 1999 a "Final Report of the State Police Review-Team" (July 2, 1999) concluded that the New Jersey State Police had made insufficient progress in the recruitment and hiring of females and minorities sinc e 1992 . The report found that the New Jersey State Police had little regard for the professional growth and the diversity of its members . Furthermore, the report found that the New,,, Jerse y State Police habitually failed to promote minorities and women and that if a minority or female employee complained of disparate treatment, the response of the New Jersey State Police was to delay or else to fail altogether to take the complaint seriously . Discrimination Against Mr . Longori a Mr . Longoria entered the New Jersey State Police Academy in March 1988 and served as a New Jersey State trooper beginning in July 1988 . During the course of his career as a New Jersey State trooper, Mr . Longoria, who is Puerto Rican, complained abou t racial discrimination in the workplace . During his employment he suffered physical injuries that appear to have been related to the discriminatory practices by the New Jersey State Police . 2 2For purposes of determining the taxability of the settle- ment proceeds at issue, we need not determine definitively whether any given injury was in fact the result of discrimination . Rather, it is sufficient that Mr . Longoria makes a (continued . . .) Injury During Trainin g In June 1988 while he was at the State Police Academy, . Mr . Longoria was singled out to participa e in a wrestling training exercise where he was injured wh n his weapon struck his rib cage . He sustained . bruised ribs and experienced severe pain . In another exercise a trooper instructor--who wanted Mr . Longoria to resign--purposely blocked the doorway of the gas chamber during a training session, causing Mr . L ngoria to excessively inhale a noxious chemical agent and suff r gagging and burning in his lungs . Mr . Longoria was, singled out during a swimming exercise, as many other minority recruit had been in the past,' by being required to swim extra laps whi e physically exhausted, which sickened him . Injury as a Troope r After he passed his training and became a New Jersey State trooper, Mr . Longoria suffered addit'iona injuries as the apparent direct result of discrimination In November 1989 while Mr . Longoria was out on patrol, he encou tered a suspect . Befor e approaching the individual, Mr . Longori a called his station an d '(, . .continued) colorable contention that the injuries w discrimination, since his settlement wit could have taken colorable damages into the subsequent discussion refers to ihju result of the discrimination that Mr . Lo not attempt to find the extent to which ination was in fact the proximate cause re the result o f the State of New Jersey ccount . For that reason ries as the apparen t goria .suffered and does is employer's discrim- of the injuries . requested backup . The station was near Mr . Longoria's location, yet no one responded to his call for ; backup . As a result , Mr . Longoria attempted to arrest the individual by himself, and he injured his back when the suspect resisted arrest . Ha d Mr . Longoria's backup arrived, the arrest would have been easier, and it is likely that he would not have been injured . In 1998 . Mr . Longoria's locker was top-loaded by a group of renegade troopers known as "The . Phantom" or the "Lords of Discipline" in retaliation for his . complaints . The renegade troopers put all of Mr . Longoria's .gear, including his vest, boots, and leather onto the top shelf to make the locker top- heavy . The arrangement had its intended effect when Mr . Longoria opened the locker, it fell on him, and he injured his back . Mr . Longoria experienced additional injury that may have been made more likely by his having been given substandard duty assignments as a result of his minority status . In February 1990 Mr . Longoria was injured when he was sent out to investigate a wild raccoon sighting, an assignment he received because of his minority status and which would usually have been handled by a local animal control officer . Mr . Longoria was bitten or scratched by the rabid animal, and the injury required him to undergo painful rabies shots, causing swelling, nausea, and flu- like symptoms which resulted in his missing substantial time from work . In 1991 Mr . Longoria sustained injury when his patrol vehicle caught fire . Like other minority troopers, Mr . Longori a was assigned a substandard vehicle with h'gh mileage, which he believes accounts for the fire . He escap d from the,fire bu t suffered from smoke inhalation . ' As a result of these injuries Mr . Longoria sometimes sought medical attention and .required-time off . Mr . Longoria was allowed sick leave with pay, and the State of New . Jersey paid .all of Mr . Longoria's medical bills . Mr . Lo goria suffered no lost wages or out-of-pocket medical expenses s a result of hi s injuries . Mr . Longoria's State Court Lawsui t As a result of the discrimination r . Longoria had experienced during his employment, he fi ed complaints with the U .S . Equal Employment Opportunity Commis ion, and he . also filed an action in Federal District Court in 1 99 against the State o f 3Mr . Longoria also suffered some in j attenuated relation to ethnic discrimina was assigned to the Flemington Station a trooper, became almost a personal caddy Because of his unfamiliarity with the ar of the commander that he be in the area personal residence on patrol, he was inv while on patrol, injuring his back . No received this assignment, and Mr . Longor risk of accident to this sort of assignm Mr . Longoria was assigned to an area whe make arrests on the basis of "profiling" Mr . Longoria believed that this assignme his complaints about discrimination . Wh was involved in another auto accident--a believed) of an increased risk of accide area--and he re-injured his back . 81 uries with a mor e ion : In June 1989 he d, as a minority State o the commander . a and the expectations f the commander' s lved in an auto accident . on-minority trooper ever a attributed a higher nt . In May 199 0 e he was required to for sexual orientation . t was in retaliation for le on that patrol, he ain, as the result (he t in an unfamilia r 8 - New Jersey concerning the discrimination . The District Court dismissed the Federal charges on the State's motion for summary judgment and dismissed without prejudice the supplemental State law claim . Following the dismissal of his State law claim in the Federal District Court action, in 2002 . Mr . Longoria filed a suit in State court against .the State of New Jersey ., styled Emblez Longoria . v . State of New Jersey, et . al . , No . MER-L-1533-02 (N .J . Super . Ct . Law Div .) . On July 29, 2003, Mr . Longoria filed his fourth amended complaint in that lawsuit . His highly detailed complaint sets forth a history .of alleged minority hiring practices by the New Jersey State Police beginning in 1961 and a DOJ lawsuit in 1975 that resulted in a consent degree . The complaint describes various alleged workplace incidents directed at some o f Mr . Longoria's fellow recruits and troopers, as well as incidents of racial discrimination in the workplace experienced b y Mr . Longoria himself . Mr . Longoria's complaint asked for compensatory and punitive damages, reasonable attorney's fees, court costs and interest thereon, and equitable and injunctive relief based on four separate counts : (1) violation of the .New Jersey Law Against Discrimination Act (LAD), N .J . Stat . Ann . secs . 10 :5-1 et . seq, (2) violation of 42 U .S .C . section 1983, a statute allowing a civil action for deprivation of rights, (3) direct constitutional claims, and (4) violation of the New Jersey Conscientious Employees Protection Act (CEPA), a whist eblower statute, N .J . Stat . Ann . secs . 34 :19-1 et . seq . The o ly enu.meration'in the complaint of the damages Mr . Longoria suffered as a result of th e ""State of New Jersey's actions appears in paragraph 102 of th e first count : As a result of the unlawful retaliation personally experienced by Plaintiff, he has suffered loss of income ; loss of fringe benefits .(including hut not. limited to medical benefits, dental benefits, and pension benefits) ; . loss of seniority in higher positions ; severe mental anguish ; anxiety ; stomach problems ; sleep disorder ; stress ; diminution of the quality of .his li e and other hedonistic injury . In addition to those damages, there are several- allegations in the complaint of fear and emotional distress, as well as significant stress . Mr . Longoria's comp aint does not allege that he experienced physical injuries during his employment as a result of his discrimination, such as ribs being bruised in a wrestling exercise, excessive exposure t achemical agent, smoke inhalation from a fire, being bitten by rabid racoon, and back injury . His attorney in the discrimination suit, Mr . Buckman, brought these physical injuries to the a tention of the State of New Jersey during the settlement negotia ions, but no evidence was offered to show that physical injuri s were ever mentioned in writing during the pendency of the State court suit, an d Mr . Longoria made no showing that the St to of New Jersey - 10 - attached any significance to his,physical injuries in settling the case . On October 3, 2005, the, State of New Jersey and . Mr . Longoria entered into a Release and Settlement Agreement under whic h Mr . Longoria would be paid $156,667 by the State'of New Jersey for a release of "all claims and rights which he may have against" the State of New Jersey . . The settlement agreement did not allocate the payment of $156,667 to, any specific claim or alleged injury, but we find that none of the award was intended to compensate Mr . Longoria for lost wages or backpay . Even when Mr . Longoria was injured and out on sick leave he received 100 percent of his pay . Furthermore, any lost wages due to alack of promotion were de minimis . Mr . Longoria testified that he would have received $800 more per year for being promoted to detective , .but that there was no pay difference between the officer position he held and the specialist jobs he was interested in . Paragraph 5 of the settlement agreement provided that the "State of New Jersey shall issue an IRS 1099 Form with respect to th e consideration paid to" Mr . Longoria . As agreed in the settlement agreement, the State of New Jersey paid Mr . Longoria $156,667 in 2005 and issued him a Form 1099-MISC, Miscellaneous Income , reflecting the settlement payment . Tax Advice From Certified Publ ic Account~ n t - 1 1 Before signing the settlement agreement, Mr . Longoria, discussed with his attorney, Mr . Buckman, the nature of the settlement and its possible tax implicat'ons . Mr . Buckma n testified that he and Mr . Longoria talke d about the settlement being all for pain and suffering, becaus that (and not los t wages) was the essence of Mr . Longoria's case . When Mr . Longoria pressed him about the taxability of the ettlement award , Mr . Buckman instructed Mr . Longoria to c nsult a ta x professional . In past years Mr . Longor i had hired return preparers at a cost of $200 to $25 .0, but Mr . Longoria heeded Mr . Buckman's advice and retained a cert fied public accountant (C .P .A .) to prepare his 2005 Form 1040, .S . Individual Incom e Tax Return, at a cost of $600 . The C .P .A . Mr . Longoria retained ha been preparing ta x returns for 26 years and testified that e is familiar with the law concerning the taxability and non-ta ability of settlement awards .' Mr . Longoria gave the C .P .A . t l e Form 1099-MISC issue d 'Respondent objected to the testimoi ground that the C .P .A .'s identity was no least 2 weeks before the trial as was re pretrial order . Rather, Mr . Longoria id (not the individual accountant) in his p received by respondent's counsel 4 busin trial . However, the C .P .A .'s somewhat i appear on Mr .. Longoria's Form 1040, alon legible name of the accounting firm . Re representation of any frustrated attempt 0 y of the C .P .A . on the revealed to him a t {uired by the standing ntified the C .P .A . firm etrial memorandum ss days before the :legible signature did r with the perfectly pondent made no to get information from . (continued . . ) - 12 - by the State of New Jersey, his Forms W-2, Wage and Ta x Statement, and other information regarding some expense deductions . When he met with the C .P .A ., Mr . Longoria did not have any papers with him regarding the lawsuit or settlement .5 However, :Mr . Longoria explained to the C .P .A . that he had been a party to litigation with the State of New Jersey and had received an award to settle all his claims, but that the settlement agreement did not specifically allocate the monetary award among his claims . In the process of determining-whether Mr . Longoria's settlement would be excludable from gross income under section 104(a)(2), the C .P .A . read through section 104(a)(2) of the Internal Revenue Code and inquired whether the settlement was fo r "( . . .continued) the accounting firm at any time or to interview the C .P .A . in the 4 days before trial .. When he testified, the C .P .A . offered no new documents as exhibits and made no new allegations that constituted surprise to respondent, but only corroborated the testimony of Mr . Longoria himself--except that in one respect discussed below the C .P .A .'s testimony was unhelpful t o Mr . Longoria (i .e ., that Mr . Longoria did not show the settlement agreement to the C .P .A .) . Quite apart from the testimony of any witness, the Form 1040 itself makes it very clear tha t Mr . Longoria did hire a C .P .A . who did prepare a Form 1040 that reported the settlement proceeds (on "Statement 1" attached to the Form 1040), and the C .P .A .'s testimony only confirmed that . In this circumstance we-find that the C .P .A .'s testimony should be admitted . 5The C .P .A . . testified that Mr . Longoria did not give him the settlement agreement or anything from the court during their meeting, while Mr . Longoria stated that he did . We found the C .P .A .'s recollection of that detail of the meeting to be more credible and conclude that Mr . Longoria did not present the C .P .A . with any paperwork related to the lawsuit and settlement . med that he had suffered injury and sickness . Nonetheless, Mr . ngoria did represent t o the C .P .A . that he was not sure .whethe r e entire settlement . wa s for his physical injuries or only a port on of it was . He informed the C .P .A . that the settlement ettled. all claims he had against the State, but the, C .P .A . did no inquire as to what the underlying causes of action were that g a e rise to th e settlement . When the C .P .A . .learned that Mr . L o goria did not have the settlement agreement with him, the C .P .A . did not requir e Mr . Longoria to provide it . He did not sk for the complaint or any other documentation relating to the awsuit . The C .P .A . made no attempt to discuss the underlying cas with eithe r Mr . Longoria's counsel or anyone from th State of New Jersey . Instead, he simply relied on Mr . Longori is representations that the settlement award was for wrongs that included his physica l injuries and that the settlement agreeme t made no discernible allocation of damages . From those facts the C .P .A . concluded that all of .,Mr . Longoria's settlement wa excludable from gros s income under section 104(a)(2) . The C .P .A . then prepared Mr . Longor a's 2005 Form 1040 and included with it an attached Statement 1 Miscellaneous Income . Although the C .P .A . had concluded that t e settlement award was non-taxable, and that the award would no have to be reported at 14 - all, the C .P .A . proposed that Mr . Longoria report the $156,667 payment . received from the State of New Jersey under the settlement agreement as a non-taxable injury and sickness award on Statement 1 with his Form'1040 . The C .P .A . testified that he included the Statement 1 with Mr . Longoria's Form 1040 because the settlement . payment was a significant item and a Form 1099- MISC had been issued . He did not want Mr . Longoria's Form 1040 to be flagged for audit for failure to include such a substantial item, and the C .P .A . did not want it to seem as if they were hiding anything . Following the C .P .A .'s advice in good faith, Mr . Longoria included the Statement 1 with his Form 1040 and did not include any portion of the $156,667 settlement award in his 2005 taxable income . Mr . Longoria timely filed his 2005 Form 1040 . The Statutory Notice of Deficiency and the Commencement of This Sui t The IRS disagreed with Mr . Longoria's position that .the $156,667 settlement award was excludable from gross income under section 104(a)(2), and on September 24, 2007, the IRS mailed a statutory notice of deficiency to Mr . Longoria . In that notice the IRS determined a deficiency of $50,066 and an accuracy- related penalty of $10,013 under section 6662(a) for 2005 . Mr . Longoria timely petitioned this Court on November 23, 2007, for a redetermination of that deficiency and the accompanying penalty . In his petition Mr . .Longoria stated that he "does not 15 - believe the taxes, .interest and penalties claimed . are due in whole or in part because the amount received by [him] is not considered income in whole or in part under the law . " I . Taxability of Settlement Awar d OPINION As a general rule, the IRS's determ nations are presumed correct, and the taxpayer has the burden of establishing that th e determinations in the notice of deficiency are erroneous . Rule 142(a) ; Welch v . Helvering, 290 U .S . 111, 115 (1933) . Section .61(a) . provides the followin broad definition of th e term "gross income" : "Except as otherwi e provided in thi s subtitle , gross income means all income rom whatever source derived " . Section 61 ( a) is thus broa d its scope, . and exclusions from gross income must be na r owly construed . Commissioner v . Schleier , 515 U .S . 323 , 28 (1995) . Section 104(a) provides that gross ncome does not include : (2) the amount of any dam gesf6' (other tha n punitive damages) received (wh ther by suit or agreement and whether as lump ums or as periodic payments) on account of person 1 physical injuries o r physical sickness * * * . * 'The term "damages received (whethe by suit or agreement)" means an amount received (other than workmen's compensation) through prosecution of a legal suit or a tion based upon tort or tort type rights, or through a settlemen agreement entered into in lieu of such prosecution .. Sec . 1 .104-1(c), Income Tax Regs . (26 C .F .R .) . - 16 - * * * For purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness . . The preceding sentence shall not apply to an amount of damages not in excess of the amount paid for medical care (described in subparagraph (A) or (B) of section 213(d)(1)) attributable to emotional distress . The legislative history shows that "[ilt is intended that the term emotional distress includes symptoms (e .g ., insomnia, headaches, stomach disorders) which may result from such emotional distress ." H . Conf . Rept . 104-737, at 301 n .56 (1996), 1996-3 C .B . 741, 1041 . Therefore, to be excludable from gross income under section 104(a)(2), a settlement award must be paid to a taxpayer on account of physical injury or physical sickness, which does not include emotional distress or symptoms thereof . ' Where damages are received pursuant to a settlement agreement like Mr . Longoria's, the nature of the claim that was the actual basis for settlement controls whether those damages are excludable under section 104(a)(2) . United States v . Burke , 504 U .S . 229, 237 .(1992) . Whether the settlement payment is excludable from gross income under section 104(a)(2) depends on the nature and the character of the claims asserted in the lawsuit . See Bent v . Commissioner , 87 T .C . 236, 244 (1986), affd . 835 F .2d 67 (3d Cir . 1987) ; Church v . Commissioner , 80 T .C . 'Although section 104(a)(2) allows damages for pain and suffering to be excluded from income to the extent of costs paid for medical care to treat the condition, that provision provides no benefit to Mr . Lon .goria, .because he suffered no out-of-pocket medical expenses related to any pain and suffering since the State of New Jersey paid for all of his medical expenses . 17 - 1104, 1106-1107 (1983) ; Glynn v . Commissioner , 76 T .C . 116, 11 9 (1981), affd . without published opinion 76 F .2d 682 (1st Cir . 1982) . The determination of the underlyng nature of the claim is factual . Robinson v . Commissioner , 1 2 T .C . 116, 126 (1994), affd . in part, revd . in part and remande on another issue 70 F .3d 34 (5th Cir . 1995) ; Sea v . Commissioner, 58 T .C . 32, 3 7 .Where there is a settlement agreeme t, the determination of the nature of the claim is usually made y reference to the agreement . See Knuckles v . Commissioner 349 F . 2d 610, 613 (10t h Cir . 1965), affg . T .C . Memo . 1964-33 ; Ro inson v . Commissioner , supra .at .126 . If the settlement agreeme t lacks express language stating the claims that payment was to settle, the intent of the payor (here, the State of New Jersey) is critical to that determination . Knuckles v . Commissioner supr a at 613 ; see also Agar v . . Commissioner , 290 F .2d 283, 284 (2d Cir . 1961), affg . per , curiam T .C . Memo . 1960-21 . It is Mr . Longoria's position tha t injury and sickness as a result of the d scrimination,and retaliation to which he was subjected wh le serving as a New Jersey State trooper . As a result, whe n the State of .New Jersey settled the lawsuit Mr . Longoria had ini fated for "all claims and right he may have against * * * [the State of New Jersey ] including all claims for pain and sufferling " (emphasis added), 18 - Mr . Longoria took this to be primarily'a settlement-for the physical injury and sickness he had sustained . Therefore , Mr . Longoria, on advice of a tax professional, concluded that his settlement award was non-taxable under section 104(a)(2) . It is respondent's position that since, the settlement agreement between Mr . Longoria and the State of New Jersey is silent as to the, allocation of the monetary award to certain damages, Mr . Longoria's complaint in the suit that gave rise to the settlement must dictate which claims were at issue and settled by the agreement . As none of Mr . Longoria's claims in that complaint alleged physical injury or sickness, other than symptoms attributable to emotional distress ; respondent argues that none of Mr . Longoria's settlement should be excludable from his gross income under section 104(a)(2) . We must reject Mr . Longoria's position . The settlement agreement is essentially silent as to what claims the settlement intended to satisfy--it settled "all claims and rights whic h * * * [Mr . Longoria] may have against * * * [the State o f New Jersey] including all claims for pain and suffering" . Since "pain and suffering" is a broad term that includes emotional distress and its symptoms, the agreement gives no description that would exclude the damages under section 104(a)(2) . We mus t therefore look to Mr . Longoria's State court complaint to'see whether it states more particular claims (i .e ., " physical injury 19 - or physical sickness") that would justify exclusion . 'See United States v . Burke , supra at 237 ; Church v . Co mm is sioner ,' supra a t 1106-1107 . The claims Mr . Longoria ass e ted against the State of New Jersey were for discrimination, reta l iation, and civil rights violations ; and the damages Mr . Longori a claimed were : loss of income ; . loss of fringe bene limited to medical benefits, dental benefits) ; loss of seniority in hig mental anguish ; anxiety ; stomach pr stress ; diminution of the quality o hedonistic injury . its (including but no t benefits, and pension er positions ; severe blems ; sleep disorder ; his life and othe r Most of these injuries--loss of income, (including but not limited to medical be efits, dental benefits, and pension benefits), and loss of(cid:127)senio ity in highe r positions--are non-physical . And the al eged injuries which are , in whole or in part, physical--i .e ., sev re mental anguish, anxiety, stomach problems, sleep disorde , stress, diminution of the quality of his life and other hedoni tic injury--arise from the emotional distress Mr . Longoria suffered and the symptoms of that distress . Because section 104(a)(2 and the flush language of section 104(a) require that, to be ex luded from income, any damages must arise from personal . injury r personal sickness other than emotional distress or the sym toms thereof, we cannot hold that the damages claims in Mr . Long ria's complaint were for the types of injuries whose compensation is meant to be excluded from income under section 104(a)(2) . - 20 - Although Mr . Longoria gave credible testimony at trial about other injuries that were plainly physical--e .g ., bruised ribs, smoke inhalation, animal bite, and back injury--none of thes e injuries was alleged in Mr . Longoria's complaint, and we cannot find that the State of New Jersey agreed to settle because of .them . While the settlement agreement does state that the settlement "releases all claims including those of whic h [the State of New Jersey] is not aware", it was Mr . Longoria' s burden to prove some discernible allocation between the emotional distress-type damages that were pleaded in the State court complaint and the physical injuries about which he testified at the trial in this case . Mr . Longoria did not carry that burden . Without much explanation, Mr . Longoria's posttrial brief asks us to allocate one-third of the $156,667 settlement award to physical injuries and two-thirds to non-physical injuries, punitive damages, and. costs . Without an evidentiary basis for such an allocation, we decline to adopt Mr . Longoria's allocation or to attempt any other . In his posttrial brief Mr . Longoria cites Eisler v . Commissioner , 59 T .C . 634 (1973), for the proposition that the Court should use its best judgment in coming up with an allocation of damages between claims, and that even if a litigant failed to raise a cause of action in the pleadings or by amendment thereto, the Court can allocate the settlement to that - 21 - cause of action if it played a role in of ~ecting the settlement . Mr . Longoria's statement of the holding ii Eisl er is correct, bu t his reliance on it is misplaced . In Eisler (a case not involving excl sion under - section 104(a)(2)), the Court did in fac t find that-a claim no t pleaded in the complaint was nonetheless settled by an unallocated settlement agreement, becaus the claim was brought up between the respective parties' couns ls .during settlement negotiation . -However, the Court reached that conclusion onl y because it was "satisfied by the testimo y of a. former officer of * * * [the defendant in the . State court awsuit], petitioner himself, and counsel for the respective itigants that both th e stock claim and the threatened negligenc claim had real value in the minds of the litigants * * * when th y executed th e Release" . Id . at-640 . The testimony in Eisle r was sufficien t for the Court to determine that the unploaded claim wa s contemplated as part of the settlement . See also Seay v . Commissioner , 58 T .C . 32 (1974) (where t e negotiators for .each party testified, the taxpayer successful y established that th e nature of claim was for personal injury) . Mr . Longoria offere d no analogous testimony and has not prove the intent of the Stat e of New Jersey . While we find Mr . Longoria's testim ony to be sincere an d find that he suffered discrimination fro: m his employer that 22 - apparently led to several physical injuries, the determinative issue is whether the State of New Jersey intended to compensate Mr . Longoria for his physical injuries when it paid him the settlement award . On the basis of the record before us, we cannot find that the State of New Jersey placed any importance on Mr . Longoria's physical injuries . The only relevant testimony Mr . Longoria presented regarding the State of New Jersey's intent was that of his attorney in the State court lawsuit, . Mr . Buckman . Mr . Buckman testified that he did bring up Mr . Longoria's physical injuries during hi s settlement negotiations with the State's attorney, Catherine Tamasik, but he testified that Ms . Tamasik dismisse d Mr . Longoria's physical injuries as insignificant by saying "well those are only a handful many years ago, I don't think a jury would be that outraged ." Mr . Buckman also acknowledged that "I don't know what [Ms . Tamasik's] true opinion was" and that since she contacted him regarding a settlement before he told her about Mr . Longoria's physical injuries, one could assume "she already had an opinion that * * * the case should be settled . " Respondent argues that Mr . Longoria's physical injuries could not have been part of the lawsuit that was settled because any such claims would have been barred by the statute of limitations . However, Mr . Longoria argues that his injuries were excepted from the general statute of limitations under the theory - 23 - of continuing violation .8 We need not re ch the question of whether damages from the physical injuries sustained b y Mr . Longoria were time-barred (as respondent claims) or wer e recoverable under a continuing violation theory (as Mr . Longoria claims) . See Natl . R .R . Passenger Corp . . Morgan, 536 U .S . 101 (2002) (distinguishing between discrete acts of discrimination and a continuing violation theory, the Court held that discrete acts of discrimination, if time-barred, annot be revived by other discrete acts of discrimination, e en if similar) ; Caggian o v . Fontoura , 804 A .2d 1193 (N .J . Super . t . App . Div . 2002) (applying rationale of Natl . R .R . Passen er Cor p . v . Morgan , supra , to an LAD claim under N .J . Stat . nn . secs . 10 :5-1 throug h 10 :5-49 (West 2002 &, Supp . 2009)) .- Even assuming that recovery was potentially available in the State c urt lawsuit fo r Mr . Longoria's physical injuries, Mr . Lo goria did not present any witness from the State of New Jersey to testify as toits intent, nor did he present any other evi ence from which we might infer the State's actual intent . There f re, we cannot determin e 8A continuing violation allows a cl at least one of a series of acts, whic h cause of action, fell within the statuto applies the continuing violation theory Jersey Law Against Discrimination, N .J . through 10 :5-49 (West 2002 & Supp . 2009) Stores , 729 A .2d 1006 (N .J . 1999) . im to proceed so long a s 11 together created a y period . New Jersey o claims under the Ne w Stat . Ann . secs . 10 :5-1 See Wilson v . Wal-Mart - 24 - the State of New Jersey's intentions in settling the lawsuit so as to make an allocation as the .Court did in Eisler . The character of the settlement payment hinges ultimately on the dominant reason of the payor in making the payment . (cid:127)See Agar v . Commissioner , 290 F .2d at-284 ; Fono v . Commissioner , 79 T .C . 680, 696 (1982), affd . without published opinion 749 F .2d 37 (9th Cir . 1984) . Mr . .Longoria did not establish that he received the $156,667 settlement award, or . any identifiable part thereof, from the State of New Jersey on account of personal physical injuries or physical sickness . For that reason we find that the $156,667, is not excludable under section 104(a)(2) from Mr . Longoria's gross income for his tax year 2005 . II . Accuracy-Related Penalty Under Section 6662(a) 9 A . Mr . Longoria's Underpayment Was Attributable To a Substantial Understatement of Income Tax Under Section 6662(b)(1) and (d) (1) . The IRS determined that Mr . Longoria was liable for a section 6662(a) accuracy-related penalty for 2005 on account of his failure to report the $156,667 settlement payment as gross income . Section 6662(a) and (b)(1) and (2) imposes a 20-percen t '.Respondent's posttrial brief argued that Mr . Longoria,had conceded the penalty because his "petition did not request that the penalty be redetermined ." . Although the petition did not explicitly plead reasonable cause as a defense to the asserted accuracy-related penalty, Mr . Longoria's pretrial memorandum raised this defense, and respondent made no objection t o Mr . Longoria's testimony as to his reliance on the advice of a C .P .A . We hold that this issue was tried by consent . 25 - penalty on an underpayment of tax that re ults either from negligence10 or disregard of rules and reg lations-or from a ., substantial understatement of income tax . By definition, an understatement of income tax is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000 . Sec . 6662(d)(1)(A) . Mr . Longoria's understatement of inc me tax of $50,066 exceeds 10 percent of the tax required to be shown on his return--i .e ., 10 percent of $72,415--and is greater . than $5,000 . In such a case, the accuracy-related penalty of section 6662(a) is mandatory--that is, the statute says it "shall be added"-- unless the taxpayer can show that the understatement was due to "reasonable cause * * * and that the tax ayer acted in good faith" . Sec . 6664(c)(1) . Respondent ha .carried the burden of production imposed by section 7491(c), leaving Mr- . Longoria with the burden of proving reasonable cause . See . Higbee v . Commissioner , 116 T .C . 438, 446-447 (200 ) . Therefore , Mr . Longoria will be liable for the section 6662(a) accuracy related penalty unless he can show his s bstantial'understatemen t '°Negligence is defined as any fail u attempt to comply with the provisions of 3(b)(1), Income Tax Regs . Respondent ha Mr . Longoria 'was negligent in excluding his gross income under section 104(a)(2) Mr . Longoria was negligent is a question e to make a reasonable the Code . Sec . 1 .6662- not allege d he settlement award from Therefore, whethe r we need not reach . 26 - of Federal income tax was due to reasonable cause and that he acted in good faith . Mr . Longoria Has Shown Reasonable Cause and Good Faith Which Excuses Him From the Accuracy-Related Penalty Under Section 6662(a) . The determination of whether a taxpayer acted with reasonable cause and in good faith is made on acase-by-case basis, taking into account all pertinent facts and circumstances, including the extent of the taxpayer's efforts to assess his or her proper tax liability ; the taxpayer's education, knowledge,_ and experience ; and the taxpayer's reasonable reliance on a tax professional . Sec . 1 .6664-4(b)(1), Income Tax .Regs . (26 C .F .R .) . The extent of the taxpayer's efforts to assess the proper tax liability is generally the most important factor . Id . Good- faith reliance on professional advice concerning tax laws may be a defense to section 6662(a) penalties . United States v . Boyle , 469 U .S . 241, 250-251 (19 .85) ; see also sec . 1 .6664-4(b)(1), Income Tax Regs . Reliance on professional advice is not an absolute defense to the section 6662(a) penalty, . Freytag v . Commissioner , 89 T .C . 849, 888 (1987), affd . 904 F .2d 1011 (5th Cir . 1990), affd . 501 U .S . 868 (1991) ; but reasonable cause exists where a taxpayer relies in good faith on the advice of a qualified tax adviser and the taxpayer provided the adviser with all necessary and accurate information, see Neonatology 2 7 Associates, P .A . v . Commissioner , 115 T .C1 . 43, 99 (2000), affd . 299 F .3d 221 (3d Cir . 2002) . Mr . Longoria is not liable for the section 6662(a) penalt y because he reasonably and in good faith rJelied on the advice of a tax professional in reporting th e ent payment as non- taxable income . Mr . Longoria wa s hathis settlement fro m the State of New Jersey might have tax i plications . Therefore , after his own attorney could not advis e im as to the ta x consequences of .the settlement, he did n t simply seek tax advice from his regular return preparer but rat er, at a greater cost, sought advice from a licenced tax profes ional, a C .P .A ., an d disclosed the settlement payment to him . Even though ; Mr . Longoria did-not volunteer the actua settlement agreement t o the C .P .A . (who did not require it), Mr . Longoria did accurately describe its contents--in particular, ex laining that .there was no allocation of the award among his non physical damages and his physical injuries . The C .P .A . testified that Mr . Longoria "made [it] clear to me that * * * [the'settlem nt agreement] did,not g o through the process of identifying how m ch, if any, of thi s award as to what dollars ." The C .P .A ., o claimed to b e familiar with the provisions of sectio n 04 (a) (2) , never- asked Mr . Longoria for a copy of the complaint in order to ascertai n the underlying causes of action, and we . 0 28 - Mr . Longoria should have known that the C .P .A . needed it, absent a request . The C .P .A . interviewed Mr . Longoria about the facts of his lawsuit and settlement, and Mr . Longoria was correct in his answers . The C .P .A . asked Mr . Longoria whether he had been physically injured, and Mr . Longoria replied that he had been . While these injuries were not the main thrust of the lawsuit that Mr . Longoria filed and were not mentioned in the complaint, the injuries were, to Mr . Longoria, part and parcel of the discrimination that he had suffered, and his answer to the C .P .A . was correct . The C .P .A . testified that Mr . Longoria made it clear to him that "he did not have specific direction as to the nature of this award, and whether it was all for his personal injuries or part of it was for his personal injuries" . Even with this ambiguity lingering, the C .P .A . did not inquire further into the nature of the claims . Mr . Longoria brought against the State of New Jersey, but merely concluded that because Mr . Longoria suffered some physical injury, the entire settlement was non- taxable . At trial the C .P .A . explained his reasoning for excludin g the entire amount of the settlement from Mr . Longoria's income : [I]f they haven't given you astipulation, if you did suffer these * * * [physical injuries], you're comfortable saying that you suffered injuries and damages, and it was part of the overall package, I don't know how to break it down, so we will exclude it . 29 - This was erroneous advice . The C .P .A . sh uld have learned more about the claims Mr . Longoria asserted in the lawsuit and the terms of the settlement, and should then ave determined whethe r there was any basis for allocating any po rtion of the proceeds t o physical injuries . J It was not Mr . Longoria ' s fault tha t his C .P .A . did not ask him more questions or request more docum ntation regarding th e underlying lawsuit and the relationship f his physical injuries to it . We do not blame Mr . Longoria for his C .P .A .'s erroneou s conclusion of law . See United States v . Boyle , supra at 25 0 ("Courts have frequently held that 'reas nable cause' is established when a taxpayer shows that h reasonably relied on the advice of an accountant * * *, even hen such advice turne d out to have been mistaken") . Respondent insists that Mr . Longori 's reliance on-his C .P .A .'s advice could not be reasonable ecause the C .P .A . based his advice on an unreasonable legal assumption and rendered his advice after unreasonably relying on the statements o f Mr . Longoria without any further investi ation . We disagree . "When an accountant or attorney advises taxpayer on a matter of tax law, such as whether a liability exi ts, it is1reasonable fo r the taxpayer to rely, on that advice ." . I . at 251 ( emphasis i n original) . Mr . Longoria sought a C . P .A . s advice on'a substantive matter of tax law, i .e ., whe her his settlement - 30 - payment was taxable . Therefore, . it was reasonable fo r Mr . Longoria to rely on that advice, even if the C .P .A . acted unreasonably in dispensing it . As the Supreme Court observed , Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney . To require the taxpayer to challenge the attorney, to seek a "second opinion," or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place . Id . ; cf . sec . 1 .6664-4(c)(1), Proced . & Admin . Regs . ("reliance may not be reasonable or in good faith if the taxpayer knew, or reasonably should have known, that_the .advisor lacked knowledge in the relevant aspects of Federal tax law") . On the basis of the .record before us, we find tha t Mr . Longoria took reasonable steps to ensure that the settlement agreement was properly reported on his 2005 Form 1040 by seeking the advice of a C .P .A ., and that he followed in good faith the advice he received from the C .P .A . by reporting the settlement proceeds on his Form 1040 in the manner that the C .P .A . advised . He will not be penalized for good-faith reliance on poor advice from a C .P .A . Conclusion . Because Mr . Longoria has failed to establish that h e received the $156,667 settlement award, or any part thereof, from the State of New Jersey on account of personal physical injuries or physical sickness, we find-that the $156,667 is not excludable - 3 1 under section 104(a)(2) from Mr . Longoria's gross income for tax year 2005 . However, because Mr . Longoria reasonably and in good faith relied on the advice of a C .P .A . .i reporting the $156,667 settlement award as non-taxable income, e find that Mr . Longoria is not liable for the 20-percent .accurac -related penalty under section 6662(a) . To reflect the foregoing, Decis on will be entered for res on ent as to the defi- ciency and for' etitioner as to the enalt . under section 6662(a) .