T.C. Memo. 1997-9
UNITED STATES TAX COURT
GARY A. SIMKO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5120-95. Filed January 6, 1997.
Gary A. Simko, pro se.
Donald K. Rogers, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7443A(b)(3) and Rules 180,
181, and 182.1 Respondent determined a deficiency in
1
All section references are to the Internal Revenue Code
as amended, unless otherwise indicated. All Rule references are
to the Tax Court Rules of Practice and Procedure.
- 2 -
petitioner's 1990 Federal income tax in the amount of $4,388 and
an accuracy-related penalty under section 6662 in the amount of
$878. After concessions,2 the only issue for decision is whether
amounts received by petitioner in settlement of a lawsuit are
excludable from income under section 104(a)(2).
FINDINGS OF FACT
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing the
petition, petitioner resided at Eaton, Ohio.
On June 9, 1989, petitioner commenced legal action against
his former employer, United Cable TV of Oakland, Inc. (United),
for damages related to the termination of his employment with
United on July 7, 1986. Petitioner's complaint asserted claims
of breach of contract, negligence, and intentional infliction of
emotional distress. Petitioner's complaint further alleged that,
as a result of United's conduct, petitioner suffered loss of
employment and employability, loss of past and future earnings,
emotional pain and suffering, mental anguish, and defamation of
character.
2
Respondent concedes that: (1) Petitioner is not liable
for the accuracy-related penalty under sec. 6662 and (2) if it is
determined that the amounts in question constitute taxable income
to petitioner, "petitioner is entitled to an itemized deduction
in the amount by which petitioner's total legal fees and costs of
$7,469.20 exceed 2 percent of petitioner's adjusted gross
income".
- 3 -
Petitioner and United agreed to a nonbinding mediation
proceeding, held on February 1, 1990. Prior to the mediation
proceeding, petitioner submitted a mediation summary which stated
in part:
[Petitioner] was employed by [United] on a full
time permanent basis starting in May 1985. * * * The
Personnel Policy Handbook which is relevant to this
case contains several important passages which confirm
that [petitioner's] employment required good cause for
discharge * * *.
Nevertheless, [United] has contested in this
litigation the nature of employment, claiming that
[petitioner] was an at-will employee and could be fired
without just cause.
* * * After being hired * * * [petitioner's]
employment continued without incident, and with good
performance in the ensuing months. * * *
In November of 1985, * * * despite assurances of
continued job security, a great number of people began
losing their jobs. In each case, [United] * * * had
put together stated reasons or allegations supposedly
justifying the terminations. * * *
[United's] alleged reason for terminating
[petitioner], although [United] claims not to have
needed a reason, was that [petitioner] was guilty of
misconduct. [United] alleges that on July 1, 1986,
[petitioner] got into the wrong truck to go out to do
field work. * * *
* * * * * * *
Analysis of the losses suffered by [petitioner] is
being performed currently by an expert, * * * Mr.
Charles Monroe, and it is expected that he may have a
verbal informal and unofficial calculation by the time
of Mediation, concerning the projected losses of
[petitioner] in terms of benefits, back pay and front
pay. * * *
- 4 -
The mediation summary does not address the tort type claims
raised by petitioner in his complaint, and does not discuss any
personal injury suffered by petitioner. The mediation panel,
upon evaluation of each party's respective position, decided that
United should pay petitioner $20,000 in damages. On March 15,
1990, petitioner and United agreed to accept the mediation
panel's evaluation, and entered a stipulation and order for
dismissal. Petitioner signed a settlement statement on April 6,
1990, acknowledging his receipt of the settlement proceeds (less
attorney's fees and expenses). The statement of settlement does
not identify or place a value on the specified claims of
petitioner.
OPINION
As a general rule, the Commissioner's determinations are
presumed correct, and the taxpayer bears the burden of proving
that those determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Except as otherwise
provided, gross income includes income from all sources. Sec.
61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).
In this regard, statutory exclusions from income must be narrowly
construed. Commissioner v. Schleier, 515 U.S. __, __, 115 S. Ct.
2159, 2163 (1995).
Section 104(a)(2) excludes from gross income "the amount of
any damages received (whether by suit or agreement * * *) on
account of personal injuries or sickness". This exclusion is
- 5 -
warranted when: (1) The underlying cause of action giving rise
to the recovery of the funds in question is based upon tort or
tort-type rights and (2) the funds are received on account of
personal injury or sickness. O'Gilvie v. United States, 519 U.S.
___, 117 S. Ct. 452 (1996); Commissioner v. Schleier, 515 U.S. at
____, 115 S. Ct. at 2163; P & X Mkts., Inc. v. Commissioner, 106
T.C. 441, 443-444 (1996); sec. 104(a)(2); sec. 1.104-1(c), Income
Tax Regs. Where damages are received pursuant to a settlement
agreement, the nature of the claim that constitutes the actual
basis for settlement controls whether such damages are excludable
under section 104(a)(2). United States v. Burke, 504 U.S. 229,
237 (1992); Foster v. Commissioner, T.C. Memo. 1996-276. "[T]he
critical question is, in lieu of what was the settlement amount
paid?" Bagley v. Commissioner, 105 T.C. 396, 406 (1995). In
determining the answer to this question, the most important
factor is the intent of the payor. Robinson v. Commissioner, 102
T.C. 116, 127 (1994), affd. in part and revd. in part 70 F.3d 34
(5th Cir. 1995).
While the parties' settlement agreement does not in any
manner allocate the proceeds to any particular claim raised by
petitioner, the settlement reflects the parties' willingness to
accede to the conclusions of the mediation panel. Therefore, we
find that the mediation panel's evaluation served as the basis of
the settlement. Petitioner's mediation summary, furnished to the
panel prior to the mediation hearing, asserted claims that United
- 6 -
breached an employment agreement by terminating petitioner. The
mediation summary, however, did not discuss any of the tort-
related claims contained in petitioner's original complaint.
Moreover, the mediation summary's proposal of damage amounts
appears to be based upon petitioner's lost earnings, rather than
upon any specific personal injury sustained by petitioner. The
mediation panel's evaluation, as well as the settlement in
question, were based upon the claim that United had breached an
employment contract in terminating petitioner, resulting in
economic damages from loss of benefits and wages. Therefore,
petitioner has failed to meet his burden of proving that the
settlement was based upon tort or tort-type claims. Furthermore,
petitioner has failed to meet his burden of proving that the
settlement proceeds were paid on account of personal injuries.
Accordingly, we sustain respondent's determination.
To reflect the foregoing,
Decision will be entered
under Rule 155.