Opinion ID: 791827
Heading Depth: 2
Heading Rank: 1

Heading: Effective Date of Amendment

Text: 9 Section 61(a) of the Internal Revenue Code defines gross income as all income from whatever source derived. I.R.C. § 61(a). The Supreme Court has broadly construed and repeatedly emphasized the sweeping scope of this section. See Commissioner v. Schleier, 515 U.S. 323, 327, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995); see also Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429, 75 S.Ct. 473, 99 L.Ed. 483 (1955). The corollary to I.R.C. § 61(a)'s expansive construction is that exclusions from income must be narrowly construed. Schleier, 515 U.S. at 328, 115 S.Ct. 2159 (quoting United States v. Burke, 504 U.S. 229, 248, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992) (Souter, J., concurring)). Thus, Lindsey's $2 million in settlement proceeds is presumed to be taxable income unless Lindsey can show the income is expressly excepted by another provision in the Tax Code. Id. 10 On appeal, the Lindseys argue damages due to personal injuries and physical sickness were excluded under I.R.C. § 104(a)(2) at the time of Lindsey's settlement negotiations and receipt of funds. Originally, I.R.C. § 104(a)(2) excluded from gross income any damages received for personal injuries or sickness. The I.R.S. and courts construed the original statutory exclusion language to incorporate nonphysical injuries, such as emotional injuries and injuries to one's reputation and character. See Roemer v. Commissioner, 716 F.2d 693, 697 (9th Cir.1983) (citing I.R.S. opinion supporting circuit court's ruling that all damages received for nonphysical personal injuries are excludable from gross income under I.R.C. § 104(a)(2)). We review the Tax Court's conclusions of law de novo, and its fact findings for clear error. See Oren v. Commissioner, 357 F.3d 854, 857 (8th Cir.2004) (standard of review). 11 Congress subsequently revised I.R.C. § 104(a)(2) in August 1996. See SBJPA, Pub.L. 104-188, § 1605(a), 110 Stat. 1755, 1838. As amended, I.R.C. § 104(a)(2) now excludes from gross income only the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. I.R.C. § 104(a)(2). Hence, damages for nonphysical injuries no longer qualify for the gross income exclusion. Mayberry v. United States, 151 F.3d 855, 858 n. 2. (8th Cir.1998) (declaring [s]ection 104(a)(2) was amended in 1996 to exclude `emotional distress' damages from the gross income exclusion). Pursuant to the SBJPA, the amendments made by this section shall apply to amounts received after the date of the enactment of this Act, in taxable years ending after such date. See SBJPA, Pub.L. 104-188, § 1605(d), 110 Stat. 1839; see also Mayberry, 151 F.3d at 858 n. 2. Congress enacted the SBJPA on August 20, 1996. See SBJPA, Pub.L. 104-188, 110 Stat. 1755. The Termination Agreement was executed as of September 28, 1996, and payment of the $2 million was made to Lindsey on December 17, 1996. 12 Lindsey submits the clear language of the statute states the effective date of the SBJPA is the tax year ending after the date of its enactment, that is, the tax year ending December 31, 1997. Since Lindsey received the settlement payment in 1996, Lindsey claims the amendment to I.R.C. § 104(a)(2) does not apply, and his settlement proceeds are not includable as gross income. The Commissioner counters that a damages payment received after August 20, 1996, as occurred in this case, falls squarely after the effective amendment date. Had Congress intended the amendment to apply only to damages received after December 31, 1996, the Commissioner contends, Congress could have so stated, without referring to the effective date of the amendment or to the taxable year in which an amount is received. We agree with the Commissioner, and conclude the plain language of the SBJPA indicates its amendments apply to damages received after August 20, 1996. Therefore, the $2 million settlement payment is includable in the Lindseys' gross income for the tax year ending December 31, 1996. 13 Lindsey claims the amendment to I.R.C. § 104(a)(2) constitutes an impermissible retroactive application of a new tax. However, I.R.C. § 104(a)(2) is not a retroactive provision, because it applies prospectively to damages received after August 20, 1996. Thus, the amendment does not affect the gross income exclusion available for personal injury damages received before the effective date of the amendment. Lindsey also contends making the amendment to I.R.C. § 104(a)(2) effective for amounts received after August 20, 1996, imposes a fortuitous windfall on some taxpayers while imposing a penalty on others. Such is true of any tax change. 14