T.C. Memo. 1997-460
UNITED STATES TAX COURT
FRED HENRY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26254-96. Filed October 9, 1997.
Robert G. Gargiulo, for petitioner.
Stephen R. Takeuchi and Keith Aqui, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: This matter is before
the Court on petitioner's Motion for Summary Judgment. The issue
for decision is whether petitioner is entitled to a judgment that
a payment in the amount of $1,623,203 that he received from E.I.
du Pont de Nemours & Co., Inc. (Dupont), in 1994 is excludable
from his taxable income for that year pursuant to section
- 2 -
104(a)(2).1 Because petitioner's motion does not provide a basis
for the disposition of all of the issues in dispute in this case,
petitioner's motion is correctly characterized as a Motion for
Partial Summary Judgment and will be referred to as such herein.
As explained in greater detail below, we shall deny
petitioner's Motion for Partial Summary Judgment on the ground
that the issue raised by the motion is not ripe for summary
adjudication.
Background2
During the period 1987 through 1991, petitioner and his then
wife were in the business of growing orchids for sale, operating
under the name Fred Henry's Paradise of Orchids. Between 1987
and 1991, petitioner applied a product known as Benlate to his
orchids for the intended purpose of preventing and controlling
disease. Benlate is manufactured by Dupont and marketed by
Universal Enterprises Supply Corp. (Universal). After petitioner
applied Benlate to his orchids, the orchids gradually showed
signs of severe damage including interference with normal growth
patterns, "chloretic" color, root loss, defoliation, and death of
plants. As a result of the losses that he suffered from using
1
Section references are to the Internal Revenue Code, as
amended. Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
2
The following is a summary of the relevant facts that do
not appear to be in dispute; they are stated solely for the
purpose of deciding the pending motion, and they are not findings
of fact for this case. See Rule 1(a); Fed. R. Civ. P. 52(a).
- 3 -
Benlate on his orchids, petitioner was forced out of the orchid
business.
On October 8, 1992, petitioner and his wife filed a civil
lawsuit against Dupont, Universal, and others in Florida State
court. Petitioner's complaint alleges: (1) Petitioner suffered
damages as a result of Dupont's negligence in its formulation,
manufacturing, and analysis of Benlate; (2) Dupont and Universal
are liable under the theory of strict product liability; and (3)
Universal is liable to petitioner for breach of warranty. The
damages that petitioner allegedly suffered include lost profits,
loss of business reputation as an orchid grower, diminution of
sales, and a diminution in the value of his nursery due to
contamination of the soil.
Petitioner's case against Dupont and Universal was tried
before a jury in 1993. During the course of the trial,
petitioner's expert testified that petitioner's damages totaled
$3,796,118, an amount composed of $3,254,000 in lost inventory
and approximately $542,000 representing the amount that
petitioner would have earned on $3,254,000 at 8 percent compound
interest over the 2-year period that elapsed between the date
petitioner terminated his orchid business and the anticipated
date of entry of the judgment.
On September 23, 1993, the jury entered its verdict in
petitioner's favor finding: (1) Dupont placed Benlate on the
market with a defect that was a legal cause of damage to
- 4 -
petitioner; (2) Universal sold Benlate with a defect that was a
legal cause of damage to petitioner; and (3) Dupont's negligence
was a legal cause of damage to petitioner. The jury further
concluded that petitioner was also negligent, assigning 80
percent of responsibility for petitioner's damages to Dupont and
Universal and 20 percent of the responsibility to petitioner.
The jury listed petitioner's total damages as $3,796,318, an
amount that is exactly $200 more than the damages estimated by
petitioner's expert at trial.
On September 28, 1993, the trial court entered a final
judgment, consistent with the jury's verdict in petitioner's
favor, in the amount of $3,037,054.3 However, on October 4,
1993, Dupont and Universal filed, inter alia, a motion to amend
the judgment to reduce the same to account for $200,000 that
Dupont previously paid to petitioner with respect to his claims.
On December 8, 1993, the trial court granted the above-described
motion and entered an amended judgment in petitioner's favor in
the amount of $2,837,054.
On December 17, 1993, Dupont and Universal filed a notice of
appeal with respect to the amended judgment. On May 31, 1994,
petitioner approved and accepted a distribution schedule which
3
The final judgment in the amount of $3,037,054 is 80
percent of the amount of the total damages determined by the jury
and reflects the jury's determination respecting the parties'
comparative negligence.
- 5 -
reflects a gross recovery from Dupont and Universal in the amount
of $2,800,000.
Petitioner did not include the payment that he received from
Dupont and Universal in his taxable income for 1994. On
September 18, 1996, respondent issued a notice of deficiency to
petitioner determining deficiencies in and additions to his
Federal income taxes for 1992 and 1994. The most significant
adjustment is respondent's determination that petitioner failed
to report income in the amount of $1,623,2034 for 1994
representing the net amount that petitioner received from Dupont
and Universal.
Petitioner filed a timely petition for redetermination with
the Court contesting the above-described notice of deficiency.
As previously discussed, petitioner contends that he is entitled
to partial summary judgment that the amount he received from
Dupont and Universal in 1994 is excludable from his income
pursuant to section 104(a)(2). Respondent objects to
petitioner's motion on the ground that material facts remain in
dispute.
4
The notice of deficiency does not provide an explanation
as to how this amount was computed. The distribution schedule
reflects a gross recovery of $2,800,000, less attorney's fees and
distributions to third parties. We are unable, however, to
reconcile respondent's adjustment with the amounts set forth in
the distribution schedule, nor are we required to do so for
purposes of this opinion.
- 6 -
This case was called for hearing at the Court's motions
session in Washington, D.C. Counsel for both parties appeared at
the hearing and presented argument respecting the pending motion.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Florida Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be
granted with respect to all or any part of the legal issues in
controversy "if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable materials,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that a decision may be
rendered as a matter of law". Rule 121(b); Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th
Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);
Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The moving
party bears the burden of proving that there is no genuine issue
of material fact, and factual inferences will be read in a manner
most favorable to the party opposing summary judgment. Dahlstrom
v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.
Commissioner, 79 T.C. 340, 344 (1982).
Section 61 defines gross income to include "all income from
whatever source derived". Section 61(a)(4) specifically provides
that gross income includes "interest". Section 104(a)(2)
provides for the exclusion of "the amount of any damages received
- 7 -
(whether by suit or agreement and whether as lump sums or as
periodic payments) on account of personal injuries". The
regulations interpret this language as encompassing damages
received "through prosecution of a legal suit or action based
upon tort or tort type rights, or through a settlement agreement
entered into in lieu of such prosecution". Sec. 1.104-1(c),
Income Tax Regs. Statutory interest imposed on tort judgments,
however, must be included in gross income under section 61(a)(4),
even under circumstances in which the underlying damages are
excludable under section 104(a)(2). Brabson v. United States, 73
F.3d 1040, 1046-1047 (10th Cir. 1996); Robinson v. Commissioner,
102 T.C. 116, 126 (1994), affd. in part and revd. in part on
another ground 70 F.3d 34 (5th Cir. 1995); Kovacs v.
Commissioner, 100 T.C. 124, 128-130 (1993), affd. without
published opinion 25 F.3d 1048 (6th Cir. 1994).
Respondent's determination in the notice of deficiency that
the amount that petitioner received from Dupont constitutes
taxable income is presumptively correct, and petitioner has the
burden of proving otherwise. Rule 142(a); Welch v. Helvering,
290 U.S. 111 (1933). In order to satisfy his burden of proof,
petitioner must demonstrate that the underlying cause of action
giving rise to the damages that he received from Dupont is based
upon "tort or tort type rights", and that the damages were
received "on account of personal injuries or sickness".
Commissioner v. Schleier, 515 U.S. 323, 336-337 (1995).
- 8 -
Petitioner contends that he has satisfied his burden of
proof under section 104(a)(2) by demonstrating that the damages
that he was awarded against Dupont and Universal arose from
negligent conduct, a tort, and that the damages were paid on
account of a personal injury; i.e., the harm to petitioner's
professional reputation as an orchid grower.
Respondent counters that material facts remain in dispute.
Specifically, respondent contends that the record reflects that
petitioner received the payment in question by way of a
settlement as opposed to the State court judgment. In
conjunction with this argument, respondent contends that
petitioner has failed to show that the payment was made to
compensate petitioner for personal injuries.
Based upon our review of the entire record, we are not
persuaded that the issue of the applicability of section
104(a)(2) to the Dupont/Universal payment is ripe for summary
adjudication. Contrary to petitioner's assertion, a factual
inference may be drawn from the record that petitioner received
the payment in question pursuant to a settlement with Dupont and
Universal. In particular, the record indicates that, after
Dupont and Universal filed their appeal, petitioner accepted a
gross payment from Dupont and Universal that was approximately
$37,054 less than the amount awarded pursuant to the final
judgment of the trial court. Assuming for the moment that the
Dupont/Universal payment was in fact made pursuant to a
- 9 -
settlement, we would be required to consider any allocation in
the settlement agreement and/or the intent of the payors, to
determine whether the payment was made on account of personal
injuries or sickness. See Bagley v. Commissioner, 105 T.C. 396,
406-408 (1995), affd. 121 F.3d 393 (8th Cir. 1997).
Petitioner complains that respondent's opposition to
petitioner's motion does not comply with Rule 121(d), which
requires that supporting and opposing affidavits submitted with
respect to a motion for summary judgment shall be made on
personal knowledge and that sworn or certified copies of all
papers or parts thereof referred to in an affidavit shall be
attached thereto or filed therewith. Petitioner points out that
respondent has submitted an affidavit executed by Gregory Luna, a
Dupont legal assistant, that includes a reference to a settlement
between petitioner and Dupont, but the settlement document is not
attached to the affidavit. Petitioner is correct that the Luna
affidavit is insufficient in this regard. Nevertheless,
respondent did provide the Court with a copy of the
Dupont/Universal appeal and a copy of a distribution agreement
executed by petitioner that purportedly show that petitioner
ultimately received a payment from Dupont and Universal that is
less than the amount of the judgment entered by the trial court.
These documents suggest that petitioner entered into a settlement
with Dupont and Universal. Counsel for petitioner was unable to
definitively state that there was no settlement between
- 10 -
petitioner and Dupont. We are thus left with the uncertainty of
whether there was a settlement and the terms of the settlement if
there was one. Under the circumstances, we conclude that
petitioner is not entitled to summary judgment on the ground that
material facts remain in dispute.
Moreover, we would deny petitioner's motion even assuming
that petitioner did not enter into a settlement with Dupont and
Universal. In particular, we are not satisfied that petitioner
has proven that the underlying cause of action giving rise to the
jury's verdict in his favor is based exclusively upon "tort or
tort type rights", or that the damages were received "on account
of personal injuries or sickness". The civil complaint that
petitioner filed against Dupont and Universal includes a number
of causes of action, including tort type claims as well as a
warranty claim. Because the jury's verdict sheet indicates that
the jury held for petitioner with respect to his warranty claim
against Universal, we are unable to conclude at this time that
the underlying cause of action giving rise to the jury award is
based exclusively upon tort or tort type rights. Equally
important, an inference may be drawn that the disputed payment
was not made on account of petitioner's "personal injuries or
sickness". Significantly, the amount of damages determined by
the jury is remarkably similar to the damage estimate offered by
petitioner's expert during the civil trial--a damage estimate
that was based on the value of petitioner's lost inventory and
- 11 -
interest on such amount. Simply put, these aspects of the case
raise serious doubts that petitioner is correct in his assertion
that the Dupont/Universal payment was made exclusively "on
account of personal injuries or sickness". Commissioner v.
Schleier, supra at 336-337.
In his motion, petitioner asked "in the alternative for a
determination of material facts not in substantial controversy,
and for an order specifying those facts". As we indicated supra
footnote 2, the facts set forth in this opinion are solely for
the purpose of deciding the motion. Nevertheless, it appears
from the record that many of the facts are not in dispute, and
the Court encourages the parties to stipulate facts to the
fullest extent possible. See Rules 91, 122.
Consistent with the preceding discussion, we shall deny
petitioner's Motion for Partial Summary Judgment.
To reflect the foregoing,
An order will be issued
denying petitioner's Motion
for Partial Summary Judgment.