Opinion ID: 2600653
Heading Depth: 3
Heading Rank: 1

Heading: Determining the Character and Nature of the Settlement Proceeds Presents a Mixed Question of Law and Fact

Text: ¶ 17 Determining the true character and nature of the settlement proceeds presents a mixed question of law and fact, not a mere question of fact as the Division suggests. Because the determination of the character and nature of such proceeds is typically outcome determinative, it deserves a more thorough review than clear error. Cf. Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 500-01, 104 S.Ct. 1949, 80 L.Ed.2d 502 (1984) (according less deferential review to findings of ultimate facts which may determine the outcome of litigation). ¶ 18 In State v. Levin , we set out a policy-based balancing test for determining the amount of deference that appellate courts should pay to trial courts when reviewing mixed questions of law and fact. 2006 UT 50, ¶ 25, 144 P.3d 1096. The tripartite test considers (1) the complexity of the facts; (2) the degree to which the trial court relied on observable facts that cannot be reflected adequately in the record, such as witness demeanor and appearance; and (3) policy reasons that favor the exercise of discretion by the lower courts. Id. ¶ 25. ¶ 19 In this case, all three factors favor application of a less deferential standard of review. First, the facts are straightforward and uncomplicated. Second, they are reviewable from the cold record, requiring little reliance on witness demeanor. For example, the nature of the allegations in the underlying lawsuit, Whitworth's assertion of the claim of right, and the Mandells' characterization of the settlement proceeds on their 2001 federal income tax return are all facts memorialized in a written record. Third, although we are not aware of a particular demand for consistency in this area of the law, other policy reasons support a less deferential standard of review. Most importantly, application of the in lieu of test implicates due process because it is the state's jurisdictional hook for taxing the Mandells' settlement proceeds. ¶ 20 We conclude that the character and nature of a settlement or judgment under the in lieu of test presents a mixed question of law and fact and that the three Levin factors weigh in favor of according less deference to the Commission's application of the law to the facts. A finding of fact may occasionally be inseparable from the principles through which it was deduced. At some point, the reasoning by which a fact is found crosses the line between application of those ordinary principles of logic and common experience . . . into the realm of a legal rule upon which the reviewing court must exercise its own independent judgment. Bose Corp., 466 U.S. at 501 n. 17, 104 S.Ct. 1949. ¶ 21 With the appropriate standard of review in mind, we proceed to the two-step analysis pursuant to which we determine whether there is a sufficient connection for Utah to tax the settlement proceeds. We first determine the character and nature of the settlement proceeds by asking, In lieu of what was the settlement paid? See, e.g., Dye v. United States, 121 F.3d 1399, 1409 (10th Cir.1997); Pennzoil Co. v. Dep't of Revenue, 332 Or. 542, 33 P.3d 314, 317 (2001). Once we have determined the character and nature of the settlement, we then analyze whether it constitutes income taxable by the state of Utah.