t c memo united_states tax_court fred henry petitioner v commissioner of internal revenue respondent docket no filed date robert g gargiulo for petitioner stephen r takeuchi for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined deficiencies in additions under sec_6651 to and an accuracy-related ‘all section references are to the internal_revenue_code code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure penalty under sec_6662 on petitioner's federal_income_tax tax as follows year deficiency additions to tax accuracy-related_penalty dollar_figure dollar_figure -- big_number big_number dollar_figure the issues for decision are is the dollar_figure payment that petitioner received from e i du pont de nemours company inc du pont in in- cludible in his income for that year we hold that it is to the extent stated herein are the payments totaling dollar_figure that petitioner received from du pont in excludible from his income for that year under sec_104 we hold that they are not is petitioner liable under sec_6651 for for his failure_to_file a tax_return for that year and for for his failure_to_file timely his return we hold that he is not so liable for and that he is so liable for is petitioner liable under sec_6662 for for the accuracy-related_penalty we hold that he is findings_of_fact some of the facts have been stipulated and are so found general background petitioner fred henry petitioner or mr henry resided in palmetto florida at the time the petition was filed at various times during the late 1960's and the early 1970's mr henry owned and operated two gasoline service sta- tions and three pizzerias with respect to which he maintained the books_and_records mr henry's orchid activity mr henry first became interested in orchids around the late 1960's since that time mr henry who has had no formal training in horticulture has spent approximately years developing unique and high quality orchids first as a hobby and then as a business and a hobby in mr henry purchased certain real_property in manatee county florida mr henry with the assistance of his former wife donna henry a k a donna estes ms estes de- veloped that property into an orchid nursery mr henry as-- sisted by ms estes operated that orchid nursery under the name fred henry's paradise of orchids we shall sometimes refer to the orchid activity of mr henry and ms estes as mr henry's orchid activity or fred henry's paradise of orchids by at least the late 1980's mr henry had established that he had the ability to grow high quality orchids and to overcome the many problems associated with growing orchids at all relevant times mr henry maintained the books_and_records of fred henry's paradise of orchids and understood that money received from the sale of orchid plants is taxable_income mr henry and ms estes retained a tax_return_preparer return preparer to whom they gave yearend information for use in preparation of their tax returns mr henry and ms estes used the accrual_method of accounting in reporting the income and the expenses relating to mr henry's orchid activity and reported that income and those expenses in schedules c of their tax returns schedules c all orchid plants in that activity were included in the schedules c as inventory costs associated with the purchase and raising of those plants were either included in inventory costs or expensed in the schedules c at all relevant times fred henry's paradise of orchids was a wholesale and not a retail operation although it occasion- ally sold orchid plants at retail to members of orchid societies and certain others who desired to purchase high quality orchids during many of the plants of fred henry's paradise of orchids were sold to selby botanical gardens selby an impor- tant botanical garden and world renowned orchid center whose customers generally were interested in very high quality plants the other principal wholesale customers of mr henry's orchid activity during were sagaert's orchids in lake worth florida and log cabin garden center in st petersburg florida for a certain period prior to date mr henry exhibited certain of his orchid plants at flower shows and special events made presentations to orchid societies and others interested in growing orchids and permitted orchid societies to visit his nursery the american orchid society awarded prizes to fred henry's paradise of orchids for the quality of certain of its orchid plants orchid plants take five to nine years to reach maturity and certain types of orchid plants may have a very long life ex- pectancy orchid plants are salable only when they are in flower the age size quality and flowering capacity of the orchid plant and the reputation of the orchid grower are factors in determining the value of such a plant a large orchid plant of high quality with excellent flowering capacity increases in value as it becomes older during the period through around date mr henry purchased and used a chemical fungicide manufactured by du pont which was marketed under the name benlate df benlate mr henry applied benlate to all orchid plants in his possession in order to prevent the growth of or to eradicate fungus which was harmful to those plants in addition to the orchid plants owned by fred henry's paradise of orchids mr henry had in his possession orchid plants owned by third parties a large portion of the orchid plants in mr henry's possession were not for sale but were used to propagate orchid plants for future sales or to develop further unique orchids certain other orchid plants in mr henry's possession were immature and not ready for sale sometime during mr henry noticed diminishing flower production in at least some of the orchid plants in his pos- session during selby and certain others who had purchased orchid plants from mr henry that became defective returned those plants to mr henry and or made complaints about them customers of fred henry's paradise of orchids were not interested in purchasing orchid plants that had benlate problems by date petitioner had sold plants which had been treated with benlate before they showed signs of deformity and which even- tually developed deformity all of the orchid plants in mr henry's possession became deformed unmarketable and useless as unique plants as a result of his having applied benlate to them and many of them died during du pont realized that its fungicide benlate may be responsible for damaged plants established a benlate claims process and retained crawford company crawford as its representative to work in the field to assist it in evaluating alleged damage caused by benlate and processing claims for such damage during that year mr henry began negotiating with du pont concerning the damage to the orchid plants of fred henry's paradise of orchids and other orchid plants in his possession which was allegedly caused by benlate around september or date a representative of du pont inspected the orchid plants in mr henry's possession and informed him that those plants had been damaged by benlate mr henry decided to and did cease making business sales of orchid plants by fred henry's paradise of orchids in date at which time he had between and orchid plants that were in salable condition after mr henry decided to stop making orchid business sales in date he did not receive requests to sell orchid plants to exhibit them or to make presentations to orchid societies and other similar groups beginning in and continuing into du pont made payments that it referred to as assistance payments assistance payments to persons who filed claims claimants with du pont for alleged damage caused by benlate the intention of du pont in making the assistance payments was to assist the claimants to pay bills and other expenses that they had difficulty in paying as a result of the alleged damage to their businesses caused by benlate to help reestablish their businesses to mitigate losses and for goodwill du pont made an assistance payment to a claimant only after having received a claim from that claimant and having it evaluated by crawford its claims adjustor it was du pont's rule_of thumb to limit an assistance payment to one- third of the amount of any anticipated settlement between it and a claimant of that claimant's claim for damage where a claimant recovered from du pont it was expected that the assistance payment that it had made to that claimant was to be deducted as having been paid from any ultimate settlement or judgment du pont never required a claimant to repay an assistance payment that it made to such claimant du pont's benlate res-- olution manager who was in charge of assistance payments and certain other du pont officials considered that du pont had a right to ask that an assistance payment be paid back to it the return of an assistance payment to du pont was discussed by du pont officials but they never sought a formal opinion from du pont's attorneys on the question du pont requested an opinion from its tax counsel as to whether it was required to issue a form_1099 to each claimant who received an assistance payment and whether it could issue a form_1099 to such a claimant the response of du pont's tax counsel to each of those guestions was no du pont never issued a form_1099 for the assistance payments that it made by letter dated date mr henry requested dollar_figure from du pont in order to meet outstanding obligations that letter stated in pertinent part having closed my business on october 7th i have had no income now it is time to arrange for the proper disposal of the damaged plant material in order to restock my greenhouses it is necessary to go to hawaii and thailand to personally inspect any plants i am interested in purchasing to assure they are not damaged currently we need dollar_figure to meet out-- standing obligations by letter dated date crawford sent mr henry a check dated date in the amount of dollar_figure dollar_figure assistance payment which was issued by du pont to fred henry's paradise of orchids that letter stated in pertinent part enclosed is your advance assistance check that you requested delivery of this check is predicated on our agreement that you will deliver the signed assistance receipt via regular mail as soon as possible to the mailing address below our investigation of your claim is still ongoing and i will keep you advised on the progress of our evalua- tion on date mr henry signed the assistance receipt assistance receipt for the dollar_figure assistance payment that assistance receipt stated in pertinent part this will acknowledge that the undersigned has received fifty thousand and dollars dollar_figure from be i dupont de nemours company inc this payment represents assistance that i requested while e i dupont de nemours company evaluates my claim pertaining to orchids describe here the crop on which our product was used be g all ornamental bedding plants shrubs trees ag crops etc owned by or under production by the un- dersigned or said firm treated with benlate df in and i understand and agree that the full amount of this payment will be applied to the amount of a negotiated settlement if any or to any final judge- ment that may be entered with respect to my claims i understand and agree that this is neither a release on my claim nor an acknowledgement of liability by be i dupont de nemours company inc on date mr henry and ms estes entered into a partial settlement agreement relating to their contemplated divorce that agreement provided in pertinent part proceeds for settlement and or payment from b dupont de nemours company inc upon execution of this agreement any monies or proceeds received from be i dupont de nemours company inc made payable to either or both parties to either mr henry or ms estes or to both of them or to fred henry's paradise of orchids or any other entity associated with the parties shall be split in a proportion with thereof to go to the husband and to go to the wife on date mr henry and ms estes entered into a marital settlement agreement relating to their contemplated divorce that agreement provided in pertinent part proceeds from dupont the parties are cur- rently negotiating with e i dupont denemours com-- pany inc hereinafter referred to as dupont regarding damages sustained from a chemical produced by dupont it is specifically agreed that any monies or any other proceeds made payable to either or both parties or to fred henry's paradise of orchids or to henry and estes associates or any other entity as- sociated with the parties shall be split in a proportion with thereof to go to the husband mr henry and to go to the wife ms estes by letter dated date mr henry requested an additional assistance payment of dollar_figure from du pont that letter stated in pertinent part thank you very much for the assistance check dated in the amount of dollar_figure it certainly helped to ease the debt situation i suffer now i request an additional assistance check for dollar_figure in order to pay off the remainder of my debts to live up to my obligation as required by florida state law to buy back damaged and dead plants from my customers to put deposits on various groups of plants from thailand and hawaii so that i will have plants available to me when the final settlement occurs and i can get back into business without further delay xk kek by letter dated date crawford sent mr henry a check dated date in the amount of dollar_figure dollar_figure assistance payment which was issued by du pont to fred henry's paradise of orchids that letter stated in pertinent part enclosed is your advance assistance check that you requested delivery of this check is predicated on our agreement that you will deliver the signed assistance receipt via regular mail as soon as possible to the mailing address below our investigation of your claim is still ongoing and i will keep you advised on the progress of our evalua- tion on date mr henry signed the assistance receipt for the dollar_figure assistance payment that assistance receipt stated in pertinent part this will acknowledge that the undersigned has received one hundred fifty thousand dollars dollar_figure from e i dupont de nemours company inc this payment represents assistance that i requested while e i dupont de nemours company evaluates my claim pertaining to orchids describe here the crop on which our product was used be g all ornamental bedding plants shrubs trees ag crops etc owned by or under production by the undersigned or said firm treated with benlate df in and i understand and agree that the full amount of this payment will be applied to the amount of a negotiated settlement if any or to any final judge- ment that may be entered with respect to my claims i understand and agree that this is neither a release on my claim nor an acknowledgement of liability by eb i dupont de nemours company inc neither the dollar_figure assistance payment that mr henry received from du pont in nor the dollar_figure assistance payment that he received from du pont in was evidenced by a prom- issory note neither of those assistance payments was contingent upon the pledging of security and neither of them had any terms of repayment no interest accrued on the respective assistance payments that du pont paid mr henry in and when mr henry received the respective assistance payments from du pont in and he was unemployed and was re- ceiving no income mr henry was never informed that he was re- guired to repay those assistance payments at an undisclosed time prior to date mr henry submitted to crawford a claim against du pont as a result of his use of benlate in the total amount of dollar_figure which consisted of lost past and future sales lost inventory liability to customers pursuant to florida law and miscellaneous costs by letter to mr henry dated date crawford proposed on behalf of du pont a settlement with respect to that claim in the total amount of dollar_figure for projected lost sales and lost inventory by letter dated date lanny w tyler mr tyler a certified_public_accountant retained by mr henry wrote to crawford on behalf of mr henry and countered du pont's proposed settlement of dollar_figure with a proposed settlement of dollar_figure which consisted of dollar_figure for lost inventory dollar_figure of interest dollar_figure for liability to customers under florida law dollar_figure for lost profits and lost sales and dollar_figure for miscellaneous costs by letter dated date crawford wrote to mr henry on behalf of du pont and recommended a settlement of dollar_figure with respect to his claim against du pont that letter stated in pertinent part crawford company has been attempting to evaluate your claim for economic loss arising from your claimed use of du pont's registered fungicide benlate df after reviewing the information documentation you have provided to date our recommended claim settlement is dollar_figure we are recommending this amount dollar_figure to conclude any claim that you may have as a result of your claimed use of du pont's registered fungicide benlate df our offer will be withdrawn days from the delivery of this letter on date mr henry and ms estes d b a fred henry's paradise of orchids the plaintiffs commenced a lawsuit lawsuit against du pont platt chemical corporation platt universal enterprises supply corporation universal and asgrow florida company asgrow by filing a complaint complaint in the circuit_court of the 17th judicial district in and for broward county florida florida court counts i and iii of the com- plaint alleged negligence by du pont and platt respectively counts ii iv v and vii of the complaint alleged strict li- ability in tort of du pont platt universal and asgrow re- spectively counts vi and viii of the complaint alleged breach of warranty of universal and asgrow respectively on date du pont announced that it had stopped paying benlate claims because it was not responsible for losses since benlate did not damage plants on date du pont filed its answer in the lawsuit answer count i of the complaint relating to the claimed negligence of du pont alleged in pertinent part the plaintiffs fred henry and donna henry d b a fred henry's paradise of orchids utilized benlate as a fungicide on the products they were grow- ing for sale consisting primarily of orchids subsequent to the use of the benlate in question the plants developed severe damage the damages to the plaintiffs fred henry and donna henry d b a fred henry's paradise of orchids' plants were a direct and proximate result of the breach of duty and negligence of the defendant du pont in the following regards -- - a the defendant negligently formulated the product in such a way that it was hazardous to plant life b the defendant negligently failed to manufacture the product and or supervise the manufac-- ture of the product so as to render it safe for use on plants c the defendant negligently failed to test and analyze benlate to determine whether it was in fact safe for use on plants d the defendant contaminated the benlate or allowed it to be contaminated by third persons so as to render it hazardous to plants e the defendant failed to take the proper precautions to see to it that the benlate was ina safe and proper condition for use on plants f the dangerous chemical properties of benlate were known to the defendant for a sufficient length of time prior to the sale of the product to the plaintiffs such that the defendant was negligent in failing to stop the sale of benlate as a direct and proximate result of the negligence of the defendant du pont the plaintiffs fred henry and donna henry d b a fred henry's paradise of orchids have suffered and continue to suffer lost profits loss of business loss of business reputation loss of the reputation of fred henry and donna henry as orchid growers diminution of sales incurred addi- tional business_expenses have had a reduction in the value of the business have lost plants have suffered a diminution in the value of their nursery as a result of chemical contamination of the soil and have suf- fered other consequential losses and damages wherefore the plaintiffs fred henry and donna henry d b a fred henry's paradise of orchids demand judgment against the defendant du pont including interest and costs and demand trial by jury of all issues triable as of right by jury -- - in the answer du pont denied inter alia the plaintiffs’ allegations in count i of the complaint that any benlate that the plaintiffs may have purchased or used was defective that the damages to the plaintiffs orchid plants were a direct and proximate result of the breach of duty and negligence of du pont and that as a direct and proximate result of the negligence of du pont the plaintiffs suffered and continued to suffer lost profits loss of business loss of business reputation loss of their reputation as orchid growers and diminution of sales and incurred additional business_expenses had a reduction in the value of the business lost plants suffered a diminution of the value of their nursery as a result of chemical contamination of the soil and suffered other consequential losses and damages in count ii of the complaint relating to the claimed strict_liability in tort of du pont the plaintiffs alleged in pertinent part the product when sold by the defendant du pont was in a defective condition unreasonably dan- gerous to the plaintiffs fred henry and donna henry d b a fred henry's paradise of orchids' plants due to the defects in the design of the product as are more fully set forth above the defendant du pont is therefore strictly liable to the plaintiffs fred henry and donna henry d b a fred henry's paradise of orchids for any phys- ical damages or economic losses sustained by the plain-- tiffs as a result of the defective condition of the product in question as a direct and proximate result of the defective condition of the product in guestion the plaintiffs fred henry and donna henry d b a fred henry's paradise of orchids have suffered and con- tinues sic to suffer lost profits loss of business loss of business reputation loss of the reputation of fred henry and donna henry as orchid growers diminu- tion of sales incurred additional business_expenses have had a reduction in the value of the business have lost plants have suffered a diminution in the value of their nursery as a result of chemical contamination of the soil and have suffered other consequential losses and damages in the answer du pont denied inter alia the foregoing al- legation in count ii of the complaint in du pont's answer du pont also alleged certain affirma- tive defenses against fred henry and donna henry d b a fred henry's paradise of orchids including that any damages sustained by the plaintiffs as a result of the incident described in the complaint were caused solely by their negligence fault or want of care or were substantially contributed to by their actions or inactions and that benlate was misused by them or by their agents prior to the trial in the lawsuit depositions were held by du pont of possible witnesses including customers and others among the claims made by du pont during those depositions were that mr henry knowingly sold contaminated orchids that he did not know how to grow orchids that he used improper growing media that he improperly used fertilizer that he improperly used pesticides that he improperly stored fertilizers and pesticides that he improperly watered his orchids that he used improper sanitation methods that he improperly cleaned his equipment and that he otherwise used other poor growing prac-- tices ina report that du pont had prepared prior to the trial in the lawsuit eugene moody concluded that the problems at henry's paradise of orchids florida are due to poor plant management methods du pont's attacks on mr henry's business reputation and his reputation as an orchid grower were reported in in certain newspapers during the trial in the lawsuit which lasted from date through date du pont contested mr henry's ability to grow orchids his knowledge of growing or- chids his growing practices and his ability to sell orchids during that trial dr poole one of du pont's experts testified that he found disease in mr henry's orchid nursery and improper cultural practices another of du pont's experts james b werle mr werle a certified_public_accountant valued the total loss of the plaintiffs at between dollar_figure and dollar_figure and valued their inventory at dollar_figure that was du pont's position at the end of the trial in the lawsuit during closing arguments to the jury after the trial in the lawsuit one of du pont's attorneys argued that mr henry's credibility was at issue and that du pont had shown that mr henry did not use good growing practices at the trial in the lawsuit an expert witness of the plaintiffs george c reavy mr reavy an economist valued petitioner's total loss at dollar_figure in arriving at that total loss mr reavy valued the actual inventory of mr henry and ms estes d b a fred henry's paradise of orchids which had been counted by crawford at dollar_figure their inventory which had been discarded but which were represented by tags at dollar_figure and their additional orchid plants known as cattleyas at dollar_figure for a total inventory value of dollar_figure mr reavy added eight percent interest to that total inventory value in order to arrive at a total loss of dollar_figure that was the position of the plaintiffs at the end of the trial in the lawsuit the attorneys for the plaintiffs in the lawsuit did not present any evidence at the trial in that lawsuit concerning damage allegedly caused by the evidence that du pont presented during that trial during closing arguments to the jury after the trial in the lawsuit one of the plaintiffs' attorneys argued that the plain- tiffs were seeking damages only for their lost inventory and not for loss of their reputation that attorney argued in pertinent part as follows now this is probably the simplest economic chart ever presented in a case but basically what it boils down to is this remember we had dr reavy come up and explain to you that he looked at the inventory and what he did he only did one thing with the inventory - - and that is he reduced it from retail to wholesale in other words when they had done the inventory they did it on a retail basis and dr reavy said no wait a minute if he's going to be a wholesale grower we'll put a wholesale value on it dr reavy actually re- duced the inventory to this big_number to reflect the wholesale value of the plants then if you may re- member what we did then was i said now dr reavy if you figure in just eight percent a year on that money for the last two years what are the losses to fred and donna because of the loss of their inventory when you figure in the eight percent for two years it comes out to dollar_figure now i submit to you that that's a very conserva-- tive figure when you think about it all we're asking for here is the inventory we're not asking for busi- ness - or the loss of the business or loss of reputa-- tion or any of that sort of stuff that's purely the value of the inventory emphasis added after closing arguments to the jury at the conclusion of the trial in the lawsuit the florida court instructed the jury in relevant part as follows if your verdict is for du pont and universal you will not consider the matter of damages but if you find for fred henry and donna henry you should de- termine and write on the verdict form in dollars the total amount of damage which the greater weight of the evidence shows that they sustained as a result of the incident complained of the total amount of loss or damage may be cal- culated either by considering the value of the lost inventory or considering the lost value of the business immediately before the claimed injury and its value immediately after on date the jury rendered a verdict jury verdict in the trial in the lawsuit as part of the jury verdict the jury found that du pont placed benlate on the market with a defect which was a legal cause of damage to the plaintiffs that there was negligence on the part of du pont which was a legal cause of damage to them and that there was negligence on the part of the plaintiffs which was a legal cause of damage to them the jury charged percent of total re- sponsibility to du pont and percent of total responsibility to the plaintiffs in other words the jury found du pont per- cent negligent and the plaintiffs percent negligent the jury further found that the total amount of damages sustained by the plaintiffs without any reduction for the percentage of responsi- bility that the jury charged to them was dollar_figure that total amount of damages was reduced to dollar_figure to take account of the jury verdict that the plaintiffs were percent negligent on motion of du pont the judgment of dollar_figure was reduced to dollar_figure in order to account for the total of dollar_figure in assistance payments that du pont had made to mr henry in and on date the florida court entered an amended final judgment judgment in the plaintiffs' favor in the amount of dollar_figure on date du pont inter alia filed a notice of appeal with respect to the judgment while the judgment was on appeal the plaintiffs and du pont engaged in settlement negotiations as a result of those negotiations on date the plaintiffs offered to settle the lawsuit for dollar_figure and that settlement offer was accepted by du pont on the same date the dollar_figure settlement negotiated between the parties in the lawsuit was part of a global_settlement of some claimants against du pont and was paid_by du pont as a result of the jury verdict pursuant to the stipulation of settlement to which the parties in the lawsuit agreed on date stipulation of settlement du pont also agreed to pay the plaintiffs' costs of the lawsuit those parties executed a document entitled release indemnity and assignment and a notice of voluntary dismissal of the appeal of that lawsuit was filed on or about date of the dollar_figure that du pont agreed in the stipulation of settlement to pay the plaintiffs in the lawsuit total settlement amount du pont paid dollar_figure to their attorneys dollar_figure to various third parties a total of dollar_figure to ms estes and a total of dollar_figure to mr henry settlement payment dollar_figure of which du pont paid mr henry around date and dollar_figure of which it paid him around date du pont prepared two forms 1099-misc one for and one for relating to the dollar_figure that it paid pursuant to the stipulation of settlement both of those forms indicated that that amount was nonemployee compensation and that fred henry's paradise of orchids and krupnick campbell the law firm which represented the plaintiffs in the lawsuit were the recipients of that amount petitioner's tax treatment of the amounts at issue petitioner's tax treatment of the dollar_figure assistance payment mr henry discussed the tax treatment of the dollar_figure assistance payment that he received from du pont in with edward william gargiulo mr gargiulo an enrolled_agent who had been his return preparer since around at the time mr gargiulo was considering the issue of the tax treatment of the dollar_figure assistance payment he had never encountered an as-- sistance payment in the preparation of a tax_return mr gargiulo did not know what the character of the dollar_figure as-- sistance payment was and he made no effort to determine the character of that payment neither mr gargiulo nor mr henry consulted a tax attorney the internal_revenue_service service or a certified_public_accountant regarding the tax treatment of the dollar_figure assistance payment although mr gargiulo did not know what the character of the dollar_figure assistance payment was he nonetheless concluded that no portion of that payment constituted ordinary_income of mr henry for mr gargiulo advised mr henry that he was not re- guired to and mr henry did not file a tax_return for since mr henry's income was below the amount at which sec_6012 would have required him to file a tax_return for that year henry estes associates filed form_1065 u s partnership return of income for form_1065 which mr gargiulo prepared the partners of henry estes associates that were shown in the form_1065 were fred henry and donna henry the dollar_figure assistance payment that mr henry received from du pont in was not reflected in the form_1065 instead that form showed an ordinary_loss from an orchid activity of henry estes associates in the amount of dollar_figure petitioner's tax treatment of the dollar_figure settlement payment at some time before the jury verdict was reached in the trial in the lawsuit mr henry discussed the tax treatment of any possible recovery that he might receive from du pont with the lead attorney for the plaintiffs at that time that attorney was not an expert in tax matters in addition after the jury verdict was reached mr henry raised in a social setting with mr tyler the certified_public_accountant who had represented him in settlement discussions with du pont prior to the com- mencement of the lawsuit the tax treatment of any possible recovery that he might receive from du pont mr henry retained mr gargiulo to prepare his tax_return for in preparing that tax_return mr gargiulo asked mr - - henry about the character of the payments totaling dollar_figure that he received from du pont during mr gargiulo un- derstood from mr henry that those payments were made because du pont ruined mr henry's character and he thereby suffered a personal injury having been so informed by mr henry mr gargiulo examined the master tax guide the cch tax reporter and the service publication based on mr gargiulo's examination of those materials and his understanding from mr henry that the payments totaling dollar_figure that du pont paid mr henry during were made because mr henry's character was ruined and he thereby suffered a personal injury mr gargiulo concluded that mr henry was not required to and mr henry did not report those payments as income in his tax_return for that year neither mr gargiulo nor mr henry retained a tax attorney or a certified_public_accountant or consulted the service regarding the tax treatment of the dollar_figure in payments that mr henry received from du pont during filing of petitioner's tax_return the date as extended on which petitioner was required to file his tax_return was date which was a sunday consequently the due_date of that tax_return was the next business_day which was monday date the envelope in which mr henry's tax_return was mailed to the service was postmarked on date - - notice_of_deficiency on date respondent issued a notice of de- ficiency notice to mr henry in the notice respondent determined that mr henry had failed to report as income for the dollar_figure assistance payment that he received from du pont in that year and for the dollar_figure in payments that mr henry received from du pont during that year respon- dent also determined in the notice that mr henry is liable for additions to tax under a for for failure_to_file a tax_return and for for failure_to_file timely his tax_return and for for the accuracy-related_penalty under sec_6662 because of a substantial_understatement_of_income_tax under sec_6662 b opinion petitioner bears the burden of proving that the determina-- tions in the notice are erroneous see rule a 290_us_111 the dollar_figure assistance payment petitioner received the dollar_figure assistance payment from du pont in and did not report that payment as income for that year respondent determined that the dollar_figure assistance payment is includible in petitioner's income for the parties stipulated that percent of that payment is allocable to petitioner and that percent of that payment is allocable to ms estes consequently in the event that we were to hold as we do that the dollar_figure assistance payment is income that must be reported for pursuant to the parties’ stipulation petitioner would be required to include in his gross_income for that year only percent of that payment petitioner contends that the dollar_figure assistance payment is not income in support of that contention petitioner advances the following alternative positions the purpose of the payment as stated by dupont's benlate resolution manager was to mitigate losses for good will and retain customers as such it consti- tuted a gift a gift is defined in black's law dictio- nary as a transfer of property without consideration a right benefit forbearance or detriment exchanged there was no consideration here thus the payment was a gift gifts are not taxable under sec_102 a gift required donative_intent but that intent does not have to have an altruistic motive and can be motivated by self interest a casual reading of the assistance receipt would made it appear that there was no need to repay the amount however a closer reading reveals that the full amount emphasis added of the assistance pay- ment will be subtracted from any settlement or judge- ment it does not say that if the settlement or judge- ment is less than the amount of the assistance payment the difference would not have to be repaid a zero verdict would require the return of the whole assis- tance payment this is consistent with the opinion of dupont's benlate resolution manager stated he and other dupont officials believed that dupont has the right to be reimbursed for the amount of the assistance payment an alternate way to view the assistance payment based on the receipt that it was a no interest loan which would have to be repaid loans are not income and are not taxable loans do not require a prom-- that year that issory note nor interest as suggested by the respondent a second alternate way of looking at the assis-- tance payment based on the receipt that it was a con- tingent payment on the claim which would have to be repaid at the time of settlement or judgement since dupont vigorously contested liability before the end of thus there was a clear possibility that a re- payment would be required there was no assurance the petitioner could retain the funds it could not have been an out right partial payment since there was a good chance it would have to be returned reproduced literally respondent counters that the dollar_figure assistance payment mr henry received from du pont in is income for that in support of that position respondent argues on brief the payment in question was not restricted and was not subject_to repayment it was in the nature of a par- tial payment which would be accounted for in the final settlement or judgment as it was in this case the petitioner had every claim of right to this money under the principles of 286_us_417 except as otherwise provided in the code a tax- payer must include in gross_income all income from whatever source derived sec_61 the supreme court has long recognized that the definition of gross_income sweeps broadly and reflects congress' intent to exert the full measure of its taxing power and to bring within the definition of income any accession to wealth 504_us_229 rev'g 929_f2d_1119 6th cir see also commissioner v schleier 515_us_232 ac- cordingly any receipt of funds or other accession to wealth received by a taxpayer is presumed to be gross_income unless the taxpayer can prove that the acces-- sion fits into a specific exclusion created by other - - sections of the code see 348_us_426 there is no evidence that the assistance payments were gifts they were paid to persons and businesses who were damaged by a product of du pont as indicated by du pont their rough rule_of thumb was to make assistance payments of no more than one third of the value of the damage caused the record establishes that the petitioner was offered settlements in excess of dollar_figure and dollar_figure in clearly du pont and the petitioner recognized that du pont owed petitioner substantially more than the a- mounts of the assistance payments they were not gifts but partial compensation_for the damage and made in advance to mitigate against further consequential loss by the petitioner as to the loan theory du pont never required repayment the petitioner was destitute and his only valuable asset was the cause of action against du pont none of the normal indicia of a loan are present no note no repayment schedule no interest and no security clearly the assistance payment was partial payment in compensation_for the damage done by benlate on the record before us we agree with respondent that the dollar_figure assistance payment is income for during du pont realized that its fungicide benlate may be responsible for damage to plants established a benlate claims process and retained crawford to work in the field to assist it in evaluating alleged benlate damage and processing claims for damage payment beginning in and continuing into du pont made as- sistance payments to persons who filed claims with du pont for alleged damage due to benlate the intention of du pont in making those payments was to assist the claimants to pay bills and other expenses that they had difficulty in paying due to the alleged damage to their business as a result of benlate to help reestablish their businesses to mitigate losses and for good- will du pont made assistance payments to claimants only after having received their respective claims and after having them evaluated by crawford as a rule_of thumb du pont limited the amount of any assistance payment that it made to one-third of the amount of any anticipated settlement between it and a claimant of that claimant's claim for damage thus at the time du pont made an assistance payment to a claimant it expected that it would be paying that claimant an additional_amount equal to around twice as much as the amount of that assistance payment we believe that explains why it was expected and the assistance receipt provided that any assistance payment that du pont had made to a claimant would be deducted as having been paid from any ultimate settlement or judgment relating to benlate claims by that claim-- ant in mr henry began negotiating with du pont concerning the damage to his orchid plants caused by benlate around september or date a representative of du pont inspected the orchid plants in mr henry's possession and informed him that those plants had been damaged by benlate at the end of date mr henry requested and at the end of date mr --- - henry received the dollar_figure assistance payment from du pont in late date mr henry requested and in early date mr henry received the dollar_figure assistance payment from du pont on the record before us we find that petitioner has failed to show that he was under any restrictions as to how he used either the dollar_figure assistance payment or the dollar_figure assistance payment or that he did not have full control_over how he used each of those payments we further find on that record that petitioner has failed to establish that he was under an obligation contingent or otherwise to return either the dollar_figure payment’ or the dollar_figure payment to du pont or that there were any indicia of a loan associated with either of those payments the record does show that at the respective times du pont made the dollar_figure assistance payment and the dollar_figure assistance payment to mr henry it expected to pay him substantial ad- ditional amounts with respect to his claimed damage due to his use of benlate indeed the record establishes that du pont offered mr henry a settlement of dollar_figure by letter dated march although du pont's benlate resolution manager who was in charge of assistance payments and certain other du pont of- ficials considered that du pont had a right to ask that an assistance payment be paid back to it they never sought a formal opinion from du pont's attorneys on the question moreover we do not believe that because du pont's benlate resolution manager and certain other du pont officials considered that du pont had a right to ask that an assistance payment be paid back to it du pont had the legal right to require that an assistance payment be returned to it - - from crawford and a settlement of dollar_figure by letter dated date from crawford it was not until date that du pont announced that it had stopped paying benlate claims because it was not responsible for losses since benlate did not damage plants although du pont made that announcement in early date it did not require mr henry in or at any other time to repay the assistance payments that it had made to him in and in fact du pont never required any person to repay any assistance payments that it had made although du pont never issued a form_1099 for any assistance payment that it made and although its tax counsel advised du pont that it was not required to and could not issue such a form with respect to any such payment those facts do not control our resolution of whether under the facts established by the record in this case and the applicable law the dollar_figure assistance payment that du pont made to mr henry in is income for that year based on our examination of the entire record in this case we find that petitioner has failed to establish that the dollar_figure assistance payment that du pont made to him in early date is a gift or in the alternative a loan we further find on that record that petitioner has failed to show that the dollar_figure assistance payment is not income see 348_us_426 moreover assuming arguendo that petitioner had been under a contingent obligation to return the dollar_figure assistance payment to du pont we find on the instant record that petitioner has failed to establish that he did not receive the dollar_figure assistance payment under a claim of right see 286_us_417 we turn now to mr henry's alternative argument that if the dollar_figure assistance payment could be considered an advance_payment it is clear under the law as it existed in that the payment was excluded from income due to damage to the peti- tioner's livelihood including reputation we presume that petitioner is arguing that the dollar_figure assistance payment is to be excluded from income under sec_104 on the record before us we reject any such argument sec_104 provides that gross_income does not include the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness there is no evidence in the record that when petitioner requested in late date and received in early date the dollar_figure assis-- tance payment he was making any claims of personal injuries or even any claims of loss of business reputation and or loss of reputation as an orchid grower to the contrary the record establishes that at those times mr henry was negotiating with du pont concerning the damage to the orchid plants of fred henry's paradise of orchids and other plants in his possession which was allegedly caused by benlate the record also establishes that petitioner was requesting an additional assistance payment in the amount of dollar_figure in order to pay off the remainder of my debts to live up to my obligation as required by florida state law to buy back damaged and dead plants from my customers to put deposits on various groups of plants from thailand and hawaii so that i will have plants available to me when the final settlement occurs and i can get back into business without further delay moreover the record shows that at an undisclosed time prior to date mr henry submitted to crawford a claim against du pont as a result of his use of benlate in the total amount of dollar_figure which consisted of lost past and future sales lost inventory liability to customers pursuant to florida law and miscellaneous costs by letter to mr henry dated date crawford proposed on behalf of du pont a settlement with respect to that claim in the total amount of dollar_figure for pro- jected lost sales and lost inventory by letter dated date mr tyler the certified_public_accountant retained by mr henry wrote to crawford on behalf of mr henry and countered du pont's proposed settlement of dollar_figure with a proposed settlement of dollar_figure which consisted of claims for lost inventory interest liability to customers under florida law lost profits and lost sales and miscellaneous costs the record does not show that it was the intention of du pont when it made the dollar_figure assistance payment to mr henry to compensate him on account of personal injuries to the contrary the record establishes that the intention of du pont in making assistance payments was to assist the claimants to pay bills and other expenses that they had difficulty in paying due to the alleged damage to their businesses caused by benlate to help reestablish their businesses to mitigate losses and for goodwill based on our examination of the entire record in this case we find that mr henry has failed to show that the dollar_figure assistance payment is not income for pursuant to the parties’ stipulation that percent of that payment is allocable to mr henry we hold that mr henry must include in his gross_income for that year percent of the dollar_figure assistance payment or dollar_figure addition_to_tax under sec_6651 a --1992 petitioner did not file a tax_return for respondent determined in the notice that he is liable under sec_6651 for his failure_to_file a tax_return for that year -henry estes associates a partnership consisting of mr henry and ms estes filed a form_1065 for the form_1065 did not reflect the dollar_figure assistance payment that du pont made to mr henry in date instead that form reflected a loss from the orchid activity of henry estes associates petitioner contends that he was not required to file a tax_return for in support of that contention petitioner asserts if there was no income there was no failure_to_file even if there was income the failure_to_file_penalty is not applicable where the failure_to_file is due to reasonable_cause and there is no willful neglect the petitioner did not consider the dollar_figure assistance payment income and his tax account ant did not con- sider it income the petitioner 's livelihood was destroyed and it was reasonable for them to conclude that any payment relating to that law suit would also be excludable from income to eliminate the penalty the petitioner does not have to win but only have a reasonable basis for his actions respondent counters petitioner is not disputing the fact of nonfiling he is apparently contending that his failure_to_file was due to reasonable_cause in his defense petitioner contends that he and his return preparer did not know what the tax treatment of the assistance payments should have been petitioner and his return preparer failed to consult a tax attorney the internal_revenue_service or a certified_public_accountant concerning the tax treatment of the assistance payment moreover at the time he considered the issue of the tax treatment of the assistance payment peti- tioner's return preparer had never encountered an assistance payment in the preparation of an income_tax return such a defense is no defense at all clearly petitioner was under a nondelegable duty to seek competent tax_advice rather than conclude that he did not need to file since he did not know what the tax treatment of the payment should be the addition_to_tax under sec_6651 does not apply where the failure willful neglect to file was due to reasonable_cause and not to see sec_665l1 a reasonable_cause under sec_6651 means the exercise of ordinary business care and prudence see sec_306 c proced admin regs willful neglect is defined as a conscious intentional failure or reckless indifference see 469_us_241 we consider first whether petitioner's failure_to_file a tax_return for was due to reasonable_cause and not to willful neglect because of his claimed reliance on his return preparer mr gargiulo mr gargiulo advised petitioner that he was not required to file a tax_return for that year since he did not have the amount of income that would require him to file such a tax_return under sec_6012 in this connection mr gargiulo testified in pertinent part about the reason why he did not believe that any portion of the dollar_figure assistance payment is includible in petitioner's income for as follows there was just nothing that dupont ever told us what's that -- what kind of money it was --- whether it was a goodwill money for the problems they were causing mr henry or whether it was a loan to mr henry to be paid later the character of the money i didn't know what it was nothing in the record indicates that mr henry who was aware of the circumstances surrounding du pont's decision to make the dollar_figure assistance to him in early date shared that information with mr gargiulo nor does the record show that mr gargiulo asked du pont to inform him of those circum-- stances on the instant record we find that petitioner has failed to show that it was reasonable for him to rely on the advice of mr gargiulo that it was unnecessary to file a tax_return for even though we have found that it was not reasonable for petitioner to rely on the advice of mr gargiulo with respect to his failure_to_file a tax_return we nonetheless find on the record before us that that failure was due to reasonable_cause and not to willful neglect although petitioner was aware of the circumstances relating to du pont's decision to make the assistance payment to him he also knew that du pont decided in date to stop paying benlate claims du pont's decision to stop paying benlate claims coupled with the fact that du pont did not issue a form_1099 to petitioner for with respect to the dollar_figure assistance payment could have raised a reasonable guestion in the mind of petitioner who is not an expert in tax matters as to whether that payment was income for on the record before us we find that petitioner's failure_to_file a tax_return for was due to reasonable_cause and not to willful neglect accordingly we hold that petitioner is not liable for for the addition_to_tax under sec_6651 the dollar_figure settlement payment respondent determined that the settlement payment of dollar_figure which petitioner received from du pont during is to be included in his gross_income for that year it is pe- titioner's position that that payment constitutes an amount of damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal in- juries or sickness under sec_104 and that therefore that payment is to be excluded from his gross_income for in support of that position petitioner contends that du pont agreed to pay the total settlement amount of dollar_figure pursuant to the stipulation of settlement of the lawsuit as damages for the loss of the plaintiffs' business reputation and the loss of their reputation as orchid growers that such damages are per- sonal injuries within the meaning of sec_104 and that consequently the dollar_figure settlement payment that he received out of the dollar_figure total settlement amount constitutes the amount of damages received on account of personal injuries that is to be excluded from his gross_income under that section respondent counters that the record does not support petitioner's contentions we agree with respondent in 515_us_323 the supreme court of the united_states summarized the require- ments of sec_104 as follows in sum the plain language of sec_104 the text of the applicable regulation and our decision in burke establish two independent requirements that a taxpayer must meet before a recovery may be excluded under sec_104 first the taxpayer must demon- strate that the underlying cause of action giving rise to the recovery is based upon tort or tort type rights and second the taxpayer must show that the -- - damages were received on account of personal injuries or sickness respondent concedes that mr henry satisfies the first requirement set forth in schleier however respondent contends that mr henry has failed to establish that he satisfies the second requirement set forth in schleier because he has failed to show that the dollar_figure settlement payment that he received from du pont during was received on account of personal injuries or sickness within the meaning of sec_104 the second requirement set forth by the supreme court in commissioner v schleier supra as does the first requirement involves dual inquiries in this case those inquiries are whether the claims of loss of business reputation and loss of reputation as orchid growers which mr henry and ms estes d b a fred henry's paradise of orchids alleged in the complaint in the lawsuit resulted from the negligence of du pont and its defective product benlate constitute personal injuries within the meaning of sec_104 and if so whether the total settlement amount of dollar_figure and consequently the dollar_figure settlement payment that petitioner received during are damages re- ceived on account of those injuries we address first mr henry's contention that the dollar_figure total settlement amount and consequently the dollar_figure set- tlement payment which the parties stipulated was paid as a result of the jury verdict was paid on account of the loss of the plaintiffs' business reputation and the loss of their rep- utation as orchid growers the record in this case which includes portions of the record in the lawsuit does not support petitioner's contention that all or even a portion of the total settlement amount or the settlement payment was paid on account of the loss of the plaintiffs business reputation or the loss of their reputation as orchid growers in fact the attorney in the lawsuit for the plaintiffs mr henry and ms estes d b a fred henry's paradise of orchids told the jury in his closing ar- guments that the plaintiffs were not claiming loss of reputation he stated all we're asking for here is the inventory we're not asking for business -- or the loss of the business or loss of reputation or any of that sort of stuff that's purely the value of the inventory emphasis added the foregoing statements by the plaintiffs' attorney to the jury in the lawsuit are consistent with the evidence submitted by the plaintiffs to that jury with respect to the loss that they claimed they suffered as a result of their applying benlate to the orchid plants of fred henry's paradise of orchids that evidence consisted of the testimony of the plaintiffs' expert an economist that the value of the plaintiffs' inventory of orchid plants was dollar_figure to which that expert added eight percent interest in order to arrive at the total loss that the plaintiffs claimed in that lawsuit or dollar_figure du pont also presented evidence in the lawsuit through an expert who valued the plain- tiffs' inventory at dollar_figure and who concluded that the total loss of the plaintiffs was between dollar_figure and dollar_figure no other witness testified in the lawsuit concerning the amount of damages sustained by the plaintiffs in advancing his contention that the dollar_figure total settlement amount and consequently the dollar_figure settlement payment was paid on account of the loss of the plaintiffs’ business reputation and the loss of their reputation as orchid growers mr henry reasons as follows proximate cause is the causal connection between the tortfeasor actions and the injury this is the traditional but for test dupont negligently placed on sic defective product on the market that product caused damage to orchids those damaged orchids were sold by an individual who has a reputation of producing and selling high quality orchids the orchids were generally sold to people knowledgeable about orchids the orchids became deformed failed to flower and died definitely not high quality orchids the reputation for selling and producing high quality plants was destroyed by the selling plants which became deformed and died but for the dupont's negligence the peti- tioner's reputation would not have been damaged there was no intervening cause not only is petitioner's but-for argument rejected by the record in this case which establishes that the dollar_figure total settlement amount and consequently the dollar_figure settlement payment was not paid on account of the loss of the plaintiffs' business reputation or the loss of their reputation as orchid growers that argument also was rejected as a matter of law by the supreme court in 519_us_79 in o'gilvie the supreme court held that the on account of test of sec_104 requires more than a but-for connection between the damages and a personal injury that test according to the supreme court requires that the damages be awarded by reason of or because of the personal injury and not another cause see o'gilvie v united_states supra on the record before us we find that petitioner has failed to establish that all or any portion of the dollar_figure total settlement amount or the dollar_figure settlement payment was paid_by reason of or because of the loss of the plaintiffs' business rep- utation or the loss of their reputation as orchid growers although we need not do so in order to resolve the question presented under sec_104 for the sake of completeness we shall address petitioner's contention that damage to rep- utation is clearly personal injury for the purpose of irc dollar_figure a while not altogether clear petitioner appears to be taking the position that damage to reputation is as a matter of law personal injury within the meaning of sec_104 we rejected such an argument in 111_tc_305 and we reject any such argument here in fabry the taxpayers the fabrys operated a nursery in which they grew ornamental plants and they developed a rep- utation for growing quality plants see fabry v commissioner supra pincite in connection with the operation of their nursery the fabrys used benlate on the plants that they grew and suffered extensive damage to those plants which they claimed was a result of their use of benlate see id pincite the fabrys sued du pont in the court of the ninth judicial circuit in and for orange county florida in that suit they alleged that du pont had allowed benlate to become contaminated so as to cause the damages that they suffered from having used it on their stock of plants the fabrys demanded a judgment for monetary damages from du pont under theories of negligence and strict_liability in tort under both theories the fabrys claimed that they sustained damages in the form of the lost value of destroyed or injured plants damage to their business reputation lost income and the lost value of their business after mediation the suit which the fabrys instituted against du pont was concluded pursuant to a stip- ulation under which du pont agreed to pay them dollar_figure see id pincite the parties in fabry v commissioner supra agreed that dollar_figure of the dollar_figure which du pont paid the fabrys was allocable to damages for loss of business reputation see id pincite the question presented to us in fabry was whether as argued by the fabrys that dollar_figure payment was to be excluded from gross_income under sec_104 see id pincite in advancing their position the fabrys maintained that injury to business reputation is as a matter of law a personal injury within the meaning of sec_104 see id pincite we rejected that argument see id pincite in so holding we stated in threlkeld v commissioner supra we decided not to follow our decision in roemer v commissioner t c revd 716_f2d_693 9th cir in which we distinguished between injury to personal reputation and injury to business reputation and held that damages awarded on account of defamation resulting in injury to business reputation did not give rise to damages received on account of personal injuries within the meaning of sec_104 we did not in threlkeld adopt a per se rule that damages received on account of injury to an individual's business reputa- tion are excludable under sec_104 we de- scribed the necessary determination as presenting a guestion of fact threlkeld v commissioner supra pincite we said that the determination depended on the nature of the claim presented and we looked to all the facts and circumstances of the case including the state law characterization of the claim in question a claim for malicious prosecution to determine the nature of that claim id pincite8 we found that an action for malicious prosecution is similar to an action for defamation and concluded that it would be classified as an action for personal injuries under tennessee law id pincite we concluded that the payment received for the release of the taxpayer's claims against the defendant for damage to the tax- payer's professional reputation was excludable under sec_104 id pincite having rejected the taxpayers' argument in fabry that injury to business reputation is as a matter of law a personal injury within the meaning of sec_104 we examined the facts -- - and circumstances surrounding the dollar_figure payment at issue in that case in order to determine whether that payment was made on account of personal injuries as that term is used in sec_104 see id pincite we examined inter alia the complaint that the fabrys had filed against du pont in the local florida court and the mediation that preceded settlement of that suit see id pincite in that complaint the fabrys sought damages on theories of negligence and strict_liability in tort see id pincite they alleged as essential facts in that com-- plaint that the benlate that they purchased was defective and proved detrimental to their nursery products and that as the direct and proximate result of their use of benlate they suf- fered inter alia damage to their business reputation see id pincite we pointed out in fabry v commissioner supra pincite that nowhere in the complaint filed by the fabrys did they use the term personal injuries to describe the injuries that they claimed to have suffered as a result of their use of benlate and that none of the other injuries alleged in the complaint e plant damage lost profits or loss of going-concern value is a personal injury we noted in fabry that the fabrys did not argue and we did not believe that all injuries caused by a defendant's negligence or attributable to a defendant under a theory of strict_liability in tort necessarily are personal injuries within the meaning of sec_104 see id pincite we also acknowledged that the plant damage alleged by the fabrys against du pont no doubt injured their business and consequentially their business reputation id pincite how- ever we held that nowhere in the complaint is there any claim of personal injuries as that term is used in sec_104 see id pincite we further held that there was no evidence of a claim for personal injuries in our examination of the mediation that preceded the settlement of the suit brought by the fabrys against du pont see id pincite based on our examination of all the facts and circumstances surrounding the dollar_figure payment that was made on account of the fabrys' claim of injury to their business reputation we held in fabry v commissioner supra pincite since the record of the lawsuit that is before us does not include any claim for personal injuries within the meaning of sec_104 we do not believe that the claim for injury to business reputation was on account of personal injuries as that term is used in sec_104 we have examined all of the facts and circumstances that are disclosed by the record before us surrounding the lawsuit by mr henry and ms estes d b a fred henry's paradise of orchids against inter alia du pont and the settlement of that lawsuit while the jury verdict was on appeal in the complaint in the lawsuit mr henry and ms estes d b a fred henry's paradise of orchids sought damages from inter alia du pont on theories of negligence and strict_liability in tort the plaintiffs in that lawsuit alleged as essential facts that they used benlate on the orchid plants that they were growing that those plants suffered severe damage that the damages to the plaintiffs' orchid plants were the direct and proximate result of the breach of duty and negligence of du pont that du pont sold benlate in a defective condition that du pont is strictly liable to the plaintiffs for any physical damages or economic losses sustained by the plain- tiffs as a result of the defective condition of the product in guestion and that as a direct and proximate result of the negligence of du pont and the defective condition of benlate the plaintiffs suffered lost profits loss of business loss of business rep- utation loss of the reputation of fred henry and donna henry as orchid growers diminution of sales incurred additional business_expenses have had a reduction in the value of the business have lost plants have suffered a diminution in the value of their nursery as a result of chemical contamination of the soil and have suffered other consequential losses and damages nowhere in the complaint in the lawsuit filed by mr henry and ms estes d b a fred henry's paradise of orchids or in the documents relating to the settlement of that lawsuit that are part of the record in the instant case did the plaintiffs use the term personal injuries to describe the injuries that they claimed to have suffered as a result of their use of benlate see fabry v commissioner t c pincite nor did they allege therein a claim of defamation or any other nonphysical personal tort see id we do not understand petitioner to be arguing and in any event we do not believe that the injuries alleged in the lawsuit by the plaintiffs of lost profits loss of business diminution of sales additional business_expenses a reduction in the value of the plaintiffs' business lost plants and a diminution of the value of the plaintiffs' nursery as a result of contamination of the soil are personal injuries we do not understand petitioner to be claiming and in any event we do not believe that the cause of the injuries that the plaintiffs alleged in the lawsuit ie negligent manufacture and sale of a defective product necessarily results in a personal injury within the meaning of sec_104 although the damage to the orchid plants of the plaintiffs that they alleged in the complaint in the lawsuit no doubt injured their business and consequentially their business reputation nowhere in the complaint in the lawsuit or in the documents relating to the settlement of that lawsuit that are before us is there any claim of personal injuries as that term is used in sec_104 see id pincite on the record before us we find that the plaintiffs' claims for loss of business reputation and loss of reputation as orchid growers are not on account of personal injuries within the meaning of sec_104 see id pincite on that record -- - we further find that assuming arguendo that the dollar_figure settlement payment which petitioner received from du pont during had been paid for loss of his business reputation and loss of his reputation as an orchid grower that payment was not made on account of personal injuries within the meaning of sec_104 a based on our examination of the entire record in this case we find that petitioner has failed to establish that the dollar_figure settlement payment that he received during was made on account of personal injuries within the meaning of sec_104 accordingly we sustain respondent's de- termination to include that payment in petitioner's gross_income for that year ’ addition_to_tax under sec_6651 a --1994 respondent determined that petitioner did not timely file his tax_return petitioner concedes that the service received that tax_return after date the date on which it was due and that the envelope in which it was mailed to the service was postmarked on date he contends however that he mailed his tax_return on date in the event that we were to hold as we have that the settlement payment is not to be excluded from petitioner's gross_income under sec_104 petitioner advances several al- ternative theories regarding the characterization of that payment for tax purposes we have considered all of those alternative theories and on the record before us we reject them -- - the date on which it was due and that consequently it should be treated as timely filed we disagree on the instant record mr henry must comply with the requirements of sec_7502 the section of the code which permits inter alia a tax_return that is delivered to the service after its due_date to be treated as timely filed sec_7502 provides in pertinent part sec_7502 general_rule --- date of delivery --if any return re- guired to be filed on or before a prescribed date x is after such date delivered by united_states mail to the office with which such return 1s required to be filed the date of the united_states postmark stamped on the cover in which such return is mailed shall be deemed to be the date of delivery mailing requirements --this subsection shall apply only if-- a the postmark date falls on or be- fore the prescribed date-- for the filing including any ex- tension granted for such filing of the re- turn and b the return was within the time prescribed in subparagraph a deposited in the mail in the united_states in an envelope or other appropriate wrapper postage prepaid properly ad- dressed to the office with which the return x is reguired to be filed even if as petitioner testified he timely mailed his tax_return on date sec_7502 does not permit us to treat that return as timely filed that is because the - - date postmarked on the envelope in which petitioner's tax_return was delivered to the service is date and that date is after the date on which that return was required to be filed on the record before us we find that petitioner has failed to establish that he timely filed his tax_return on that record we further find that petitioner is liable for for the addition_to_tax under sec_6651 accuracy-related_penalty under sec_6662 a ---1994 sec_6662 imposes an accuracy-related_penalty equal to percent of the underpayment_of_tax resulting from a sub- stantial understatement of income_tax an understatement is equal to the excess of the amount of tax required to be shown in we note that mr henry had it within his power to avoid the problem presented in this case he testified that he mailed his tax_return certified mail because his accountant always wants it done certified mail indeed the copy of his tax_return that is in the record has typewritten at the top of it certified mail no z if mr henry had obtained and introduced into evidence a receipt for the certified mailing of his tax_return which bore the actual date of the mailing of that tax_return the date marked on any such receipt would have been treated as the date of the u s postmark for purposes of sec_7502 see sec_7502 sec_301_7502-1 proceed admin regs if that date were date or an earlier date petitioner would have satisfied the regquirement of sec_7502 a that the u s postmark fall on or before the date as extended on which his tax_return was due mr henry either chose not to obtain a receipt for the certified mailing of his tax_return or he chose not to present at trial the receipt that he did obtain in either event he appropriately bears the risk that such inaction entails the tax_return less the amount of tax shown in the tax_return see sec_6662 a and is substantial in the case of an in- dividual if it exceeds the greater of percent of the tax required to be shown or dollar_figure see sec_6662 a the amount of the understatement is reduced to the extent that it is attributable to an item for which there was substantial author- ity see sec_6662 b i the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith see sec_6664 the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends upon the pertinent facts and circumstances see sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer's efforts to assess his or her proper tax_liability see id reliance on the advice of a professional such as an accountant does not necessarily dem-- onstrate reasonable_cause and good_faith unless under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith see id in the case of claimed reliance on the accountant who prepared the taxpayer's tax_return the ‘the amount of the understatement also is reduced to the extent that it is attributable to an item that was adequately disclosed in the tax_return and was treated by the taxpayer ina manner having a reasonable basis see sec_6662 b taxpayer must establish that correct information was provided to the accountant and that the item incorrectly claimed or reported in the return was the result of the accountant's error see 70_tc_158 respondent determined that petitioner is liable for for the accuracy-related_penalty under sec_6662 due to a substantial_understatement_of_income_tax under sec_6662 b respondent determined that mr henry's substantial_understatement_of_income_tax for is attributable to the disallowance of a dollar_figure loss that he claimed in schedule f of that tax_return and his failure to include in his tax_return for the dollar_figure settlement payment that he received from du pont during that year petitioner makes no argument under a with respect to the accuracy-related_penalty attributable to the disallowance of the loss that he claimed in schedule f of his tax_return with respect to the accuracy-related_penalty attributable to his failure to include the dollar_figure settlement payment as income in that tax_return mr henry asserts in his opening brief in regard to the penalties under sec_6662 the taxpayer has reasonable basis for his position the is substantial case law as set forth in this brief the law is changing in regard to exclusions under sec_102 based on the u s supreme courts decision in scheier which was decided in in addition the facts in this situation is substantially close to the factual situations in the cases cited reproduced literally in his reply brief mr henry further contends in regard to penalties the petitioner relied on the advice of his tax preparer an enrolled_agent an enrolled_agent has sufficient training in tax see treasurer sic circular_230 thus the petitioner was entitled to rely on his advice the advice given was based on the generally available tax information at the time and was based on recognized tax publications the schleier case would not have shown in any publications at the time of the advice we address first petitioner's claimed reliance on his return preparer mr gargiulo in this regard the following testimony of mr gargiulo is instructive q so who provided you with the characterization of the money in other words how did you come to understand what the character of this money in '94 was a through discussions with mr henry and he had sought other outside help q so as far as you were concerned --- q --- it was --- as long as it came from a damage award it was excludable a for personal injury yes q but what did the personal injury have to do with the matter a that's the character of the award q in other words if the damage was for personal injury it was your understanding that it was ex- cludable a yes sir -- - q so consequently if it was not for personal injury then it would be includable in your under- standing a could you readdress that again if it wasn't qo if the damage award was received for a cause of action which was not for personal injury would that money be includable into income a yes i would think so without seeing the actual you know ramifications of that thing i would think so q what is your definition of personal injury a in the case of mr henry q i'm just asking you for a definition of per- sonal injury you -- a okay in the case -- qo -- referred to that term a okay in the case that we have with mr henry it was for basically his character he was ruined q he was -- excuse me a he was ruined the record establishes that mr gargiulo did not make the determination that mr henry received the dollar_figure settlement payment from du pont as damages for personal injury to the contrary it was mr henry who informed mr gargiulo about the character of that payment on the instant record petitioner has failed to show that he provided correct information to mr gargiulo his return preparer and that the failure to include the dollar_figure settlement payment in petitioner's tax_return was the result of mr gargiulo's error on that record we further find that petitioner's reliance on mr gargiulo was not reasonable and that he did not act in good_faith in relying on him we now address petitioner's contention that the state of the law was such when he filed his tax_return in date that his position to exclude the payments at issue as income from that tax_return was reasonable we disagree the supreme court decided both 504_us_229 and 515_us_323 before petitioner filed his tax_return in both of those cases the supreme court explained the requirements prescribed by sec_104 a that damages be received on account of personal injuries or sickness we have found on the instant record that petitioner has failed to establish that the dollar_figure settlement payment which he received from du pont during was received on account of the loss of his business reputation or the loss of his reputation as an orchid grower and that such losses constitute personal injuries within the meaning of sec_104 we have also found that du pont issued form 1099-misc for the dollar_figure total settlement amount to fred henry's paradise of orchids and its attorneys in the lawsuit -- - on the record before us we find that petitioner has failed to show that there was reasonable_cause and that he acted in good_faith when he did not report the dollar_figure settlement payment as income in his tax_return ’ we have considered all of the contentions and arguments of petitioner that are not addressed herein and we find them to be without merit and or irrelevant to reflect the foregoing and the concessions of the parties decision will be entered under rule we find no basis whatsoever on the record before us for petitioner's position that the entire dollar_figure settlement payment was paid to him on account of the loss of his business reputation and the loss of his reputation as an orchid grower


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 4-plr-107700-01 date date distributing controlled state x business y a b c d a b c d this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction additional information was submitted in subsequent correspondence the information submitted is summarized below summary of facts distributing a state x subchapter_s_corporation files its federal_income_tax plr-107700-01 return on a calendar_year basis and uses the cash_method_of_accounting distributing has one class of outstanding_stock which is owned a percent by a b percent by a’s wife b and c percent by each of a’s and b’s children c and d distributing has engaged directly in business y a b c and d each have been actively involved in the operations and management of distributing although recently a has become less active in the management and operation of distributing distributing has submitted financial information indicating that business y as operated by distributing has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years c and d have differed on a number of fundamental business matters relating to the management and operational activities of distributing the differences of opinion between c and d are having an adverse effect on the day-to-day operations of distributing proposed transaction to alleviate the shareholder disputes distributing has proposed the following series of steps collectively the proposed transaction i distributing will form controlled under the laws of state x controlled will use the cash_method_of_accounting and file its federal_income_tax return on a calendar_year basis distributing will transfer approximately one half based on fair market values of its operating and investment_assets to controlled in exchange for all of controlled’s outstanding_stock and the assumption by controlled of related liabilities the transfer ii distributing will distribute all of controlled’s stock as follows a will exchange half of his distributing stock for a percent of controlled’s stock b will exchange half of her distributing stock for b percent of controlled’s stock and d will exchange all of her distributing stock for the remaining d percent of controlled’s stock the distribution iii controlled will elect s_corporation status immediately after the distribution representations in connection with the proposed transaction the following representations have been made a the fair_market_value of controlled stock and other consideration to be received by a b and d will be approximately equal to the fair_market_value of distributing stock surrendered by each shareholder in the exchange plr-107700-01 b no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any other capacity other than that of a shareholder of distributing c the five years of financial information submitted on behalf of distributing is representative of distributing’s present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted d following the proposed transaction distributing and controlled will each continue independently and with its separate employees the active_conduct of its share of all the integrated activities of the business conducted by distributing prior to consummation of the transaction e the distribution of the stock of controlled is carried out for the corporate business_purpose of allowing c and d to operate independently of one another the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose f distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing or controlled g there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of either distributing or controlled after the proposed transaction h there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the proposed transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 i there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the proposed transaction except in the ordinary course of business j i the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject and ii the liabilities assumed in the proposed transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of plr-107700-01 business and are associated with the assets being transferred k distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the proposed transaction l no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of controlled stock m payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length n no two parties to the proposed transaction are investment companies as defined in sec_368 and iv o the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the combined voting power of all classes of stock entitled to vote of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled rulings based solely upon the information submitted and the representations set forth above we rule as follows the transfer followed by the distribution will constitute a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing on the transfer sec_361 and sec_357 no gain_or_loss will be recognized by controlled on the transfer sec_1032 controlled's basis in each of the assets received from distributing will equal the basis of such asset in the hands of distributing immediately prior to the transfer sec_362 the holding_period for each asset received by controlled from distributing will include the period during which distributing held such asset sec_1223 plr-107700-01 no gain_or_loss will be recognized by distributing upon the distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of a b or d in the distribution sec_355 the aggregate basis of the stock of controlled in the hands of each of a b and d immediately after the distribution will be the same as the aggregate basis of the distributing stock surrendered by such shareholder in exchange therefor sec_358 the aggregate basis of the distributing and controlled stock in the hands of c immediately after the distribution will equal the basis in the distributing stock held by such shareholder immediately before the distribution allocated in proportion to the fair_market_value of the distributing and controlled stock held by such shareholder immediately after the distribution in accordance with sec_358 sec_358 and sec_1_358-2 the holding_period of the controlled stock received by the distributing shareholders will include the period during which the distributing shareholders held the distributing stock with respect to which the distribution is made provided that such distributing stock is held as a capital_asset on the date of the distribution sec_1223 as provided in sec_312 proper allocation of distributing’s earnings_and_profits will be made under sec_1_312-10 as provided in sec_1_1368-2 the accumulated_adjustments_account as defined in sec_1368 of distributing immediately prior to the distribution of the controlled stock will be allocated between distributing and controlled in a manner similar to the manner in which the earnings_and_profits of distributing are allocated see ruling above the momentary ownership by distributing of the stock of controlled in connection with the proposed transaction will not in and of itself make controlled ineligible to elect to be an s_corporation for its first taxable_year provided that controlled meets the other requirements under sec_1361 caveats the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on plr-107700-01 examination no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings procedural statements this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely associate chief_counsel corporate by stephen p fattman chief branch


internal_revenue_service department of the treasury index number u i l no washington dc person to contact telephone number refer reply to cc dom p si plr-119618-99 date date number release date legend company state shareholders a dear this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has two shareholders shareholders it is represented that company has intended to be an s_corporation since its incorporation believing itself to be an s_corporation company has operated accordingly since a after the end of its taxable_year beginning on a however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-119618-99 sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes