T.C. Memo. 2001-86
UNITED STATES TAX COURT
FRED HENRY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26254-96. Filed April 9, 2001.
Robert G. Gargiulo, for petitioner.
Stephen R. Takeuchi, for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
CHIECHI, Judge: This case is before us on remand from the
Court of Appeals for the Eleventh Circuit in Henry v. Commis-
sioner, 234 F.3d 34 (11th Cir. 2000), vacating and remanding
without published opinion T.C. Memo. 1999-205. The Court of
Appeals remanded this case for further consideration in light of
Fabry v. Commissioner, 223 F.3d 1261 (11th Cir. 2000), revg. 111
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T.C. 305 (1998). In remanding this case for that purpose, the
Court of Appeals stated: “We imply no view as to the result that
should be reached on remand.”1
The findings of fact are set forth in Henry v. Commissioner,
T.C. Memo. 1999-205 (Henry I), and are incorporated herein by
this reference.2
Fabry v. Commissioner
In Fabry v. Commissioner, 111 T.C. 305 (1998) (Fabry I), the
taxpayers (the Fabrys) operated a nursery in which they grew
ornamental plants, and they developed a reputation for growing
quality plants. See id. at 306. In connection with the opera-
tion of their nursery, the Fabrys used Benlate, a fungicide, on
the plants that they grew and suffered extensive damage to those
plants, which they claimed was the result of their use of
Benlate. See id. at 307. The Fabrys sued du Pont, the manufac-
1
By order of the Court, the parties filed opening and an-
swering briefs on remand in which they set forth their respective
positions on the result that we should reach on remand. In
petitioner’s opening brief on remand, petitioner proposes certain
findings of fact. Each of the findings of fact proposed in
petitioner’s opening brief on remand was proposed as a finding of
fact in the opening brief that petitioner filed after the trial
in this case (petitioner’s posttrial brief). In finding the
facts on the basis of the record in this case that are set forth
in Henry v. Commissioner, T.C. Memo. 1999-205, the Court care-
fully considered each of the findings of fact proposed in peti-
tioner’s posttrial brief, including those findings of fact that
are also proposed in petitioner’s opening brief on remand. On
that record, we decline to find any additional facts.
2
The stipulations of fact and exhibits attached thereto are
also incorporated herein by this reference.
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turer of Benlate, in the Court of the Ninth Judicial Circuit in
and for Orange County, Florida. In that suit, the Fabrys 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 con-
cluded pursuant to a stipulation under which du Pont agreed to
pay them $3,800,000. See id.
The Commissioner of Internal Revenue (Commissioner) conceded
in Fabry I that $500,000 of the $3,800,000 that du Pont paid to
the Fabrys constituted damages for injury to their business
reputation. See id. Thus, there was no dispute between the
parties in Fabry I, as there was in Henry I, that a specified
amount of the total damages paid was paid as damages for injury
to business reputation. The only question presented to us in
Fabry I was whether, as argued by the Fabrys, the $500,000 that
du Pont paid to them as such damages was received on account of
personal injuries, as that term is used in section 104(a)(2).
See id. at 308.
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In advancing their position in Fabry I, the Fabrys main-
tained that injury to business reputation is, as a matter of law,
a personal injury within the meaning of section 104(a)(2). See
id. at 309. We rejected that argument. See id. at 310-311.
Having rejected the Fabrys’ argument that injury to business
reputation is, as a matter of law, a personal injury within the
meaning of section 104(a)(2), we examined the facts and circum-
stances surrounding the $500,000 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 section 104(a)(2).
See id. at 311-314. Based on our examination of all the facts
and circumstances surrounding that $500,000 payment, we concluded
in Fabry I:
Since the record of the lawsuit that is before us
does not include any claim for personal injuries within
the meaning of section 104(a)(2), we do not believe
that the claim for injury to business reputation was on
account of personal injuries, as that term is used in
section 104(a)(2). * * *
Id. at 314.
The Court of Appeals reversed our decision in Fabry I in
Fabry v. Commissioner, 223 F.3d 1261 (11th Cir. 2000) (Fabry II).
After reviewing certain case law under section 104(a)(2), the
Court of Appeals turned to this Court’s opinion in Fabry I. The
Court of Appeals acknowledged in Fabry II that “The IRS stipu-
lated at trial that the $500,000 payment was properly allocable
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as damage to the Fabry’s business reputation”,3 id. at 1268-1269,
and that the case presented a single question of law, i.e.,
whether the $500,000 of damages that du Pont paid to the Fabrys
for injury to their business reputation was a payment received on
account of personal injuries within the meaning of section
104(a)(2), see id. The Court of Appeals found our facts and
circumstances approach to that question in Fabry I to be insuffi-
cient. See id. at 1269. The Court of Appeals stated: “Its [the
Tax Court’s] method of merely perusing the record, looking for
the presence of the magic words, ‘personal injury,’ either in the
complaint, the release, mediation correspondence or settlement
documents is incorrect.” Id.
In deciding Fabry II, the Court of Appeals examined intangi-
ble injuries such as injury to business reputation in light of
3
In this regard, the Court of Appeals noted:
At trial, the IRS stipulated that: (1) du Pont
was aware from the beginning that the Fabrys’ claim
included a claim for damage to their business reputa-
tion; (2) that throughout settlement discussions the
Fabrys had steadfastly presented a $500,000 claim for
damage to their business reputation; (3) that du Pont
never disputed the Fabrys’ claim for business reputa-
tion damage throughout the mediation; (4) that du Pont
sought and obtained a release specifically with respect
to the business reputation claim; and (5) that du Pont
would not have settled the case without a release of
the claim for damage to the Fabrys’ business reputa-
tion.
Fabry v. Commissioner, 223 F.3d 1261, 1268-1269 n.21 (11th Cir.
2000), revg. 111 T.C. 305 (1998).
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Commissioner v. Schleier, 515 U.S. 323 (1995), and cases decided
after Schleier, including O’Gilvie v. United States, 519 U.S. 79
(1996), and Greer v. United States, 207 F.3d 322 (6th Cir. 2000).
See Fabry v. Commissioner, supra at 1269-1270. The Court of
Appeals then examined what it considered to be the “unique facts”
presented in Fabry. See id. at 1270-1271. On the basis of that
examination, the Court of Appeals held that, in light of those
unique facts, the Fabrys had established that the $500,000 which
the Commissioner conceded was paid by du Pont as damages for
injury to their business reputation was received on account of
personal injuries, as required by Commissioner v. Schleier, supra
at 337, and consequently is excludable from gross income under
section 104(a)(2). See Fabry v. Commissioner, supra at 1271.
Henry v. Commissioner
While summarizing the procedural background of the case
before it on appeal in Fabry v. Commissioner, supra, the Court of
Appeals cited in a footnote our opinion in Henry v. Commissioner,
T.C. Memo. 1999-205, and described our findings in that opinion
as follows:
6. See also Henry v. Commissioner, 77 T.C.M. (CCH)
2209, 1999 WL 405225 (1999)(where, relying upon its
opinion in this case, Fabry v. Commissioner, 111 T.C.
305, 1998 WL 872851 (1998), the tax court found that
the $1,623,203 payment received in 1994 by the tax-
payer, a Florida orchid grower, for loss of business
reputation and loss of business reputation as an orchid
grower, in settlement of his claim for negligence and
strict liability in tort against du Pont, after appli-
cation of its chemical fungicide on his orchids, was
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not made “on account of personal injuries” within the
meaning of IRC § 104 * * * [a](2) and was includable in
gross income for income tax purposes).
Fabry v. Commissioner, supra at 1263 n.6.
With all due respect, we did not find in Henry I that the
$1,623,203 payment that petitioner received from du Pont in 1994
was for loss of business reputation and loss of business reputa-
tion as an orchid grower. On the record presented to us, we
found in Henry I that “petitioner has failed to establish that
all or any portion of the $2,800,000 total settlement amount, or
the $1,623,203 settlement payment, was paid by reason of, or
because of, the loss of the plaintiffs’ business reputation or
the loss of their reputation as orchid growers.” Henry v.
Commissioner, 77 T.C.M. (CCH) 2209, 2222, 1999 T.C.M. (RIA) 1238,
1255. In making the foregoing finding, we carefully reviewed the
record in the instant case, which included portions of the record
in the lawsuit (lawsuit) that petitioner and his former spouse
Donna Henry, d.b.a. Fred Henry’s Paradise of Orchids (collec-
tively the plaintiffs), had filed against du Pont and others. In
the lawsuit, the plaintiffs alleged, inter alia, negligence by du
Pont and strict liability in tort of du Pont. See Henry v.
Commissioner, 77 T.C.M. (CCH) at 2213-2214, 1999 T.C.M. (RIA) at
1244-1245. The plaintiffs alleged in the lawsuit that the
damages to them were a direct and proximate result of the negli-
gence of du Pont and the defective condition of Benlate. The
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plaintiffs claimed as damages in the lawsuit (i.e., as losses)
that they suffered and continue to suffer
lost profits, loss of business, loss of business repu-
tation, 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.
Henry v. Commissioner, 77 T.C.M. (CCH) at 2214, 1999 T.C.M. (RIA)
at 1244-1245.
Although the plaintiffs claimed damages in the lawsuit for
injury to their business reputation and injury to their reputa-
tion as orchid growers, at the conclusion of the trial in that
lawsuit, which lasted about a month, the plaintiffs’ attorney
informed the jury in closing arguments that the plaintiffs were
not asking for damages for loss of reputation. He stated in
pertinent part:
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 3,254,000 to reflect the
wholesale value of the plants. Then, if you may remem-
ber, 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
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to $3,796,000.
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
business--or the loss of the business or loss of repu-
tation or any of that sort of stuff. That’s purely the
value of the inventory. [Emphasis added.]
Henry v. Commissioner, 77 T.C.M. (CCH) at 2215, 1999 T.C.M. (RIA)
at 1246-1247.4
After the trial in the lawsuit, the jury rendered a verdict
(jury verdict) finding (1) that du Pont placed Benlate on the
market with a defect which was the legal cause of damage to the
plaintiffs, (2) that there was negligence on the part of du Pont
which was a legal cause of damage to them, and (3) that there was
negligence on the part of the plaintiffs which was a legal cause
of damage to them. The jury charged 80 percent of total respon-
sibility to du Pont and 20 percent of total responsibility to the
4
In Henry I, we found the statements of plaintiffs’ attorney
in closing arguments to the jury to be 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 plain-
tiffs’ expert, an economist, that the value of the plaintiffs’
inventory of orchid plants was $3,254,559, to which that expert
added eight percent interest in order to arrive at the total loss
that the plaintiffs claimed in that lawsuit, or $3,796,118. Du
Pont also presented evidence in the lawsuit through an expert who
valued the plaintiffs’ inventory at $75,000 and who concluded
that the total loss of the plaintiffs was between $172,995 and
$267,803. No other witness testified in the lawsuit concerning
the damages sustained by the plaintiffs. See Henry v. Commis-
sioner, 77 T.C.M. (CCH) 2209, 2222, 1999 T.C.M. (RIA) 1238, 1254-
1255.
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plaintiffs. In other words, the jury found du Pont 80 percent
negligent and the plaintiffs 20 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 $3,796,318. The total
amount of damages was reduced to $3,037,054 to take account of
the jury verdict that the plaintiffs were 20 percent negligent.
On motion of du Pont, the judgment of $3,037,054 was reduced to
$2,837,054 in order to account for the total of $200,000 in
assistance payments that du Pont had made to Mr. Henry in 1991
and 1992. On December 8, 1993, the Florida court entered an
amended final judgment (judgment) in the plaintiffs’ favor in the
amount of $2,837,054. See Henry v. Commissioner, 77 T.C.M. (CCH)
at 2216, 1999 T.C.M. (RIA) at 1247.
While the judgment was on appeal by du Pont, the plaintiffs
and du Pont engaged in settlement negotiations. As a result of
those negotiations, the plaintiffs offered to settle the lawsuit
for $2,800,000, and that settlement offer was accepted by du Pont
on the date it was made. That $2,800,000 settlement negotiated
between the plaintiffs and du Pont, which was part of a global
settlement of approximately 200 claimants against du Pont, was
paid by du Pont as a result of the jury verdict. Pursuant to the
stipulation of settlement to which the plaintiffs and du Pont
agreed (stipulation of settlement), (1) du Pont agreed to pay the
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plaintiffs’ cost of the lawsuit, (2) the plaintiffs executed a
document entitled “RELEASE, INDEMNITY AND ASSIGNMENT” (release,
indemnity, and assignment), and (3) a notice of voluntary dis-
missal of the appeal of the lawsuit was filed on or about May 13,
1994.5 See id.
In Henry I, we found nothing in the record before us,
including the stipulation of settlement and the release, indem-
nity, and assignment,6 which established that all, or even a
portion, of the total settlement amount, or the total settlement
payment, was paid on account of the loss of the plaintiffs’
business reputation or the loss of their reputation as orchid
growers.7 Unlike Fabry v. Commissioner, 111 T.C. 305 (1998),
revd. 223 F.3d 1261 (11th Cir. 2000), the Commissioner did not
concede in Henry v. Commissioner, T.C. Memo. 1999-205, vacated
and remanded without published opinion 234 F.3d 34 (11th Cir.
5
Of the $2,800,000 that du Pont agreed in the stipulation of
settlement to pay the plaintiffs in the lawsuit, du Pont paid
$450,000 to the attorneys, $31,139.14 to various third parties, a
total of $695,658.26 to Donna Estes, and a total of $1,623,203 to
petitioner. See Henry v. Commissioner, 77 T.C.M. (CCH) at 2216,
1999 T.C.M. (RIA) at 1247.
6
The document in the record entitled “RELEASE, INDEMNITY AND
ASSIGNMENT” appears to be an incomplete copy of that document.
7
Nor did we find anything in the record in Henry I which
established that Mr. Henry received the $150,000 assistance
payment from du Pont in 1992 by reason of, or because of, loss of
business reputation or loss of reputation as an orchid grower.
See Henry v. Commissioner, 77 T.C.M. (CCH) 2209, 2219-2220, 1999
T.C.M. (RIA) 1238, 1251-1252.
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2000), that all, or any portion, of the total settlement amount,
or the total settlement payment, was paid on account of the loss
of the plaintiffs’ business reputation or the loss of their
reputation as orchid growers. Furthermore, unlike the facts
presented in Fabry, the record in Henry v. Commissioner, supra,
did not establish (1) that throughout the trial in the lawsuit
and/or throughout settlement discussions after the jury verdict
in the lawsuit the plaintiffs had steadfastly presented claims
for a specified dollar amount as damages for injury to their
business reputation and injury to their reputation as orchid
growers, (2) that du Pont never disputed the plaintiffs’ claims
for damages for injury to their business reputation and injury to
their reputation as orchid growers throughout the lawsuit and/or
those settlement discussions, (3) that du Pont sought and ob-
tained a release specifically with respect to the plaintiffs’
reputation claims, and (4) that du Pont would not have settled
the lawsuit without a release of the plaintiffs’ claims for
damages for injury to their business reputation and injury to
their reputation as orchid growers. But see Fabry v. Commis-
sioner, 223 F.3d 1261, 1268-1269 n.21 (11th Cir. 2000); cf. supra
note 3.
Although we found on the record presented to us in Henry I
that petitioner had failed to establish that all, or any portion,
of the $2,800,000 total settlement amount, or the $1,623,203
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settlement payment, was paid by du Pont by reason of, or because
of, the loss of the plaintiffs’ business reputation or the loss
of their reputation as orchid growers, we nonetheless addressed
petitioner’s contention that “Damage to reputation is clearly
personal injury for the purpose of IRC § 104(a)(2)”. We consid-
ered that contention solely “for the sake of completeness”.
Henry v. Commissioner, 77 T.C.M. (CCH) at 2222, 1999 T.C.M. (RIA)
at 1255. We did not address that contention of petitioner
because we needed to do so in order to resolve the issue pre-
sented under section 104(a)(2) regarding the $1,623,203 settle-
ment payment, and we expressly so stated in our opinion. See id.
As we understood petitioner’s position in Henry I, petitioner was
contending that damage to reputation is, as a matter of law,
personal injury within the meaning of section 104(a)(2). We
noted that we had rejected such an argument in Fabry v. Commis-
sioner, 111 T.C. 305 (1998), and we rejected any such argument in
Henry I. See id.
We then described our approach and analysis in Fabry I and
applied the same approach and analysis in Henry I. We stated in
Henry I:
assuming arguendo that the $1,623,203 settlement pay-
ment which petitioner received from du Pont during 1994
had been paid for loss of his business reputation and
loss of his reputation as an orchid grower, that pay-
ment was not made on account of personal injuries
within the meaning of section 104(a)(2). [Emphasis
added.]
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Henry v. Commissioner, 77 T.C.M. (CCH) at 2224, 1999 T.C.M. (RIA)
at 1258.
However, as discussed above, we did not find on the record
presented to us in Henry I that the $1,623,203 settlement payment
was paid for loss of petitioner’s business reputation or loss of
his reputation as an orchid grower. Instead, we found on that
record that
petitioner has failed to establish that all or any
portion of the $2,800,000 total settlement amount, or
the $1,623,203 settlement payment, was paid by reason
of, or because of, the loss of the plaintiffs’ business
reputation or the loss of their reputation as orchid
growers.
Henry v. Commissioner, 77 T.C.M. (CCH) at 2222, 1999 T.C.M. (RIA)
at 1255. In light of the above-quoted finding that we made in
Henry I, we do not believe that the Court of Appeals’ opinion in
Fabry II requires us to change our finding in Henry I that, on
the record before us in this case, petitioner failed to establish
that the $1,623,203 settlement payment that he received during
1994 was made on account of personal injuries within the meaning
of section 104(a)(2), as construed by the Supreme Court in
Commissioner v. Schleier, 515 U.S. 323 (1995), and cases decided
after Schleier.8
8
In Fabry II, the Court of Appeals stated in a footnote:
23. While we agree that the terms of the settlement
agreement (and supporting documentation) is a factor to
be considered, see Stocks v. Commissioner, 98 T.C. 1,
(continued...)
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We have carefully considered each of the remaining issues
that we decided in Henry I. We conclude that nothing in Fabry II
requires us to change our findings as to any of those other
issues.
On careful reconsideration pursuant to the mandate of the
Court of Appeals,
Decision will be entered
for the same years in the same
amounts as previously entered
in this case.
8
(...continued)
10 * * * (1992), it is only one factor. Intent of the
payor is also a factor to be considered. See Metzger
v. Commissioner, 88 T.C. 834, 347-48 * * * (1987),
aff’d. without published opinion, 845 F.2d 1013 (3d
Cir. 1988); Knuckles v. Commissioner, 349 F.2d 610
(10th Cir. 1965). * * *
Fabry v. Commissioner, 223 F.3d 1261, 1269 n.23 (11th Cir. 2000).
With respect to the intent of the payor in Henry I, it is
noteworthy that du Pont, the payor, issued two Forms 1099-MISC
relating to the $2,800,000 that it paid pursuant to the stipula-
tion of settlement, which reflected its view that that payment is
nonemployee compensation. See Henry v. Commissioner, 77 T.C.M.
(CCH) at 2216, 1999 T.C.M. (RIA) at 1248.