T.C. Memo. 2001-192
UNITED STATES TAX COURT
RICHARD MICHAEL MANAGAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6795-99. Filed July 26, 2001.
Richard Michael Managan, pro se.
Michael A. Pesavento, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notices dated March 17, 1999, respondent
determined deficiencies in and additions to petitioner’s Federal
income taxes as follows:
Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec.
6654(a)
1995 $13,590 $1,835 $1,346 $412
1996 12,562 1,922 897 436
- 2 -
Unless otherwise indicated, all section references are to the
Internal Revenue Code for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
After concessions, the issues remaining for determination are who
has the burden of proof; whether a 1996 settlement payment is,
pursuant to section 104(a)(2) excludable from income; and whether
certain expenses incurred in 1995 and 1996 are deductible.
FINDINGS OF FACT
When the petition was filed, petitioner resided in
Titusville, Florida. During 1995 and 1996, petitioner was
married to Yvette Managan. Petitioner and Mrs. Managan did not
file individual Federal income tax returns for the taxable years
1995 and 1996.
During 1995 through June 1, 1996, petitioner was employed as
the Director of Management Services for Brevard County, Florida.
On January 26, 1996, petitioner was severely injured (i.e.,
injuries to his head, neck, back, etc.) in a motorcycle accident.
As a result of these disabilities, Brevard County asked
petitioner to resign and, on June 1, 1996, he did so.
Petitioner consulted an attorney and sought a settlement
from Brevard County. Petitioner discussed with Tom Jenkins, the
County Supervisor of Brevard County, a potential wrongful
termination claim against Brevard County under the Americans with
Disabilities Act, 42 U.S.C. secs. 12101-12213 (1994) (ADA).
- 3 -
Subsequently, on May 31, 1996, petitioner received a check from
Brevard County for $15,920. As a result, petitioner did not file
a claim against the county.
In 1992, Mrs. Managan began taking courses at the University
of Central Florida (UCF). During 1995 and 1996, petitioner and
Mrs. Managan operated a Schedule C business, Monticello Research
Group (MRG), which conducted environmental audits of real
property. During this same period, Mrs. Managan attended UCF.
While attending UCF, Mrs. Managan did quality control work as an
independent contractor for a professor. In 1996, Mrs. Managan
received a bachelor’s degree in chemistry. In 1997, she began
working in a chemistry laboratory for BTR Labs.
During 1996, shortly after his motorcycle accident,
petitioner began constructing a boat, the Dinky Dau. Petitioner
intended to use the boat to fish for lobster off the coasts of
Honduras and Nicaragua. In 1996, petitioner paid $975 to his
attorney to obtain a lobster fishing license from Honduras.
OPINION
As a preliminary matter, petitioner contends that, pursuant
to section 7491(a), the burden of proof should be on respondent.
The parties agree that the examination began after July 22, 1998.
Respondent, however, contends that the burden of proof is on
petitioner because petitioner did not satisfy the requirements of
section 7491(a). In order for respondent to have the burden of
- 4 -
proof on a factual issue, petitioner must introduce credible
evidence relating to the issue. Sec. 7491(a). Evidence is
credible if a court would find it “sufficient upon which to base
a decision on the issue if no contrary evidence were submitted”.
Higbee v. Commissioner, 116 T.C. ___, ___ (2001) (slip op. at 8)
(quoting H. Conf. Rept. 105-599 at 240 (1998), 1998-3 C.B. 755,
994). In addition, petitioner must comply with the Code’s
substantiation requirements, maintain all records required by the
Code, and cooperate with respondent. Sec. 7491(a). We address
the burden of proof separately as it relates to each issue.
I. The Settlement
Respondent determined that the $15,920 payment from Brevard
County was subject to tax. Petitioner contends that this payment
was excludable from income pursuant to section 104(a)(2). This
section excludes from gross income “the amount of any damages
* * * received (whether by suit or agreement and whether as lump
sums or as periodic payments) on account of personal injuries or
sickness”. An amount may be excluded only when it was received
both: (1) Through prosecution or settlement of an action based
upon tort or tort type rights, and (2) on account of personal
injuries or sickness. Commissioner v. Schleier, 515 U.S. 323,
336-337 (1995); sec. 1.104-1(c), Income Tax Regs.
A settlement of claims arising under the ADA, if paid on
account of personal injury or sickness, may qualify for exclusion
- 5 -
from income pursuant to section 104(a)(2), because the remedies
available include compensatory and punitive damages, as well as
damages for emotional pain, suffering, inconvenience, mental
anguish, loss of enjoyment of life, and other nonpecuniary
losses. 42 U.S.C. sec. 1981a(b) (1994); Phillips v.
Commissioner, T.C. Memo. 1997-336. Petitioner and Mr. Jenkins’
testimony established that Brevard County made the payment to
settle petitioner’s potential ADA claim for wrongful termination.
Petitioner failed, however, to establish that any portion of the
payment was for nonpecuniary damages. See Getty v. Commissioner,
91 T.C. 160, 175-176 (1988), affd. on this issue, revd. on other
issues 913 F.2d 1486 (9th Cir. 1990); Wise v. Commissioner, T.C.
Memo. 1998-4. Accordingly, petitioner is not entitled to exclude
any portion of the settlement. Because petitioner failed to
present any evidence relating to the allocation of the
settlement, we conclude that he had the burden of proof. See
Higbee v. Commissioner, supra at ___ (slip op. at 12).
II. Educational Expenses
Respondent determined that petitioner was not entitled to
deduct the cost of Mrs. Managan’s studies at UCF. Petitioner
contends that this course of study did not prepare Mrs. Managan
for a new trade or business, but it merely allowed her to
maintain and improve her skills, as well as to enhance the
reputation of MRG.
- 6 -
Educational costs incurred to maintain or improve skills
required by the individual’s trade or business are deductible as
ordinary and necessary business expenses, unless they are
incurred to meet minimum educational requirements for a
taxpayer’s trade or business or qualify the individual in a new
trade or business. Sec. 1.162-5(a) and (b), Income Tax Regs.
Prior to taking her 1995 and 1996 courses at UCF, Mrs.
Managan performed environmental audits for MRG. The chemistry
degree, however, qualified her for a new trade or business.
Indeed, she used the degree to obtain employment in a laboratory,
in 1997.
We need not address the burden of proof relating to this
issue because the documentary evidence and Mrs. Managan’s
testimony established that Mrs. Managan’s UCF classes qualified
her for a new trade or business. Accordingly, petitioner is not
entitled to deduct Mrs. Managan’s 1995 and 1996 educational
expenses.
III. The Boat
Respondent determined that petitioner is required to
capitalize legal fees paid to obtain a lobster fishing license
from Honduras and expenses (i.e., cost of utilities and moving
the partially completed vessel) relating to building the Dinky
Dau. Petitioner contends that these are deductible business
expenses.
- 7 -
Section 162(a) allows a deduction for all ordinary and
necessary business expenses paid or incurred during the taxable
year. The costs of acquiring licenses with useful lives
exceeding 1 year are capital expenditures and are not deductible
as business expenses. Radio Station WBIR, Inc. v. Commissioner,
31 T.C. 803, 815 (1959). Section 263A requires the
capitalization of direct and indirect costs incurred in the
taxpayer’s production of personal property.
We conclude that the burden of proof relating to this issue
is on petitioner. Petitioner presented no evidence that the
attorney’s fees paid to obtain a lobster fishing license provided
a benefit limited to 1996. In addition, petitioner’s testimony
established that the utility and moving expenses were incurred as
part of the construction process and are subject to section 263A.
Accordingly, petitioner is not entitled to deduct the attorney’s
fees, moving costs, or utility costs in 1996.
Contentions we have not addressed are moot, irrelevant, or
meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.