T.C. Memo. 2001-245
UNITED STATES TAX COURT
F. BROWNE GREGG, SR., AND JUANITA O. GREGG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 13188-96. Filed September 19, 2001.
Bernard A. Barton, Jr. and Harold R. Bucholtz, for
petitioners.
J. Michael Melvin, for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
THORNTON, Judge: In this Court’s original opinion, T.C.
Memo. 1999-10, vacated and remanded (11th Cir., Sept. 19, 2000),
we held that jury awards paid to petitioner husband (hereinafter
__________________
* This opinion supplements our prior opinion in Gregg v.
Commissioner, T.C. Memo. 1999-10, vacated and remanded (11th
Cir., Sept. 19, 2000).
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petitioner) pursuant to judgments against U.S. Industries, Inc.
(USI), on claims for both fraudulent inducement to enter into a
contract and tortious interference with a business relationship,
plus prejudgment interest, are not excludable from gross income
as damages received “on account of personal injuries or sickness”
within the meaning of section 104(a)(2).1 In reaching this
conclusion, we cited Fabry v. Commissioner, 111 T.C. 305 (1998),
for the proposition that we must look to all the facts and
circumstances to determine the nature of petitioner’s claims
against USI and whether his recoveries on those claims were on
account of personal injuries or sickness.
While the instant case was pending on appeal there, the
U.S. Court of Appeals for the Eleventh Circuit reversed this
Court’s decision in Fabry, stating that the “facts and
circumstances approach” used therein was “insufficient.” Fabry
v. Commissioner, 223 F.3d 1261, 1269 (11th Cir. 2000).
Thereafter, the Court of Appeals vacated our decision in the
instant case and remanded it for further consideration in light
of its decision in Fabry, stating: “We imply no view as to the
result that should be reached on remand.”
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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In Fabry, the question was whether a $500,000 payment the
taxpayers received for damage to their business reputation in
settlement of a tort action was excludable from gross income as
damages received “on account of personal injuries or sickness”
within the meaning of section 104(a)(2). The Court of Appeals
stated that the IRS had stipulated that the $500,000 payment was
properly allocable as damage to the Fabrys’ business reputation.
Id. at 1268. The Court of Appeals found on the basis of the
“unique facts” presented that the Fabrys’ business was so much a
part of their persona that “Their business reputation was their
personal reputation.” Id. at 1270. The Court of Appeals found
that the Fabrys had suffered “distress, humiliation and mental
anguish * * * through the loss of their good name”. Id.
Accordingly, the Court of Appeals concluded that the $500,000 the
Fabrys received on account of injuries to their business
reputation was received on account of personal injuries and thus
was excludable from gross income under section 104(a)(2).
In the instant case, by contrast, the parties have not
stipulated that any part of the jury awards that petitioner
received is properly allocable to damage to his reputation or to
any other particular type of injury, personal or otherwise.
Petitioners bear the burden of proof. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933); Feldman v.
Commissioner, 20 F.3d 1128, 1132 (11th Cir. 1994) (the
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Commissioner’s determination of a deficiency is ordinarily
presumed correct, and the taxpayer has the burden of proving it
is erroneous or arbitrary), affg. T.C. Memo. 1993-17. As we
discussed in our original opinion and as further discussed below,
petitioners have failed to show that the subject jury awards were
received on account of personal injuries such as distress,
humiliation, mental anguish, or any other type of personal
injury. Indeed, the record does not establish that petitioner
suffered personal injuries. To the contrary, as discussed in our
original opinion and below, the evidence strongly indicates that
the injuries redressed by the jury awards in question were
economic injuries.2
Petitioner’s Compensatory Damages for Fraudulent Inducement
On supplemental brief, petitioners argue, in conclusory
fashion and without any references to the pages of the
transcript, the exhibits, or other sources relied upon to support
2
As we discussed in our original opinion, in construing
sec. 104(a)(2), the Supreme Court and other courts have
distinguished personal injuries and economic injuries. In Fabry
v. Commissioner, 223 F.3d 1261, 1270 (11th Cir. 2000), revg. 111
T.C. 305 (1998), the Court of Appeals appeared to recognize this
distinction, stating that in a nonphysical personal injury case,
the taxpayer must establish a direct causal link between the
damages received and “an intangible element of the injury (i.e.,
emotional distress, pain and suffering, loss of reputation,
etc.).” Similarly, the Court of Appeals distinguished between
compensation paid to replace the lost value of the Fabrys’
business and amounts paid to compensate them for “distress,
humiliation and mental anguish suffered by the Fabrys through the
loss of their good name”. Id.
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their statements, that USI’s fraudulent conduct caused petitioner
to suffer damage to his business reputation and credit.
Statements in briefs do not constitute evidence. Rule 143(b).
We have found no evidence in the record that credibly supports
petitioners’ allegations of personal injury to petitioner. By
contrast, in Fabry v. Commissioner, 223 F.3d at 1263 n.4, 1270,
the Court of Appeals found evidence in the record that the Fabrys
endured personal embarrassment, lost friends, were forced to
withdraw from trade organizations, and suffered health
consequences. Unlike the taxpayers in Fabry, petitioner did not
operate the businesses in question as sole proprietorships and
has not established that his personal name was synonymous with
his businesses.
Moreover, as we discussed in our original opinion, the
record does not show that petitioner presented evidence in the
USI litigation regarding any personal injuries or that petitioner
made any specific request to the jury for an award to compensate
him for any personal injuries.
Petitioners seem to suggest that we should assign no
significance to the absence of evidence supporting their
contentions that petitioner sustained personal injuries and
received damages on account of those personal injuries. On
supplemental brief, petitioners argue that “fraud is an
inherently personal dignitary tort, and, as a result, all the
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damages received on the fraud claim are excludable from income.”
Petitioners suggest that because petitioner successfully
prosecuted claims against USI for fraudulent inducement and
because such claims generally may encompass personal injuries,
any damages petitioner received necessarily must have been on
account of personal injuries.
In effect, then, petitioners would have us make an a priori
determination, seemingly without reference to empirical evidence,
that all damages awarded on petitioner’s fraudulent inducement
claim necessarily must have been received on account of personal
injuries. Petitioners suggest that the Court of Appeals’
decision in Fabry mandates this conclusion. For the reasons
discussed below, we disagree.
As the Court of Appeals discussed in Fabry, the Supreme
Court in Commissioner v. Schleier, 515 U.S. 323, 336 (1995),
found that before a recovery may be excluded under section
104(a)(2), a taxpayer must meet two “independent requirements”:
(1) The taxpayer must show that the underlying cause of action is
based upon “tort or tort type rights”; and (2) the taxpayer must
show that “the damages were received on account of personal
injuries or sickness.” If petitioners were correct in their
argument that personal injuries inhere in certain types of torts
(such as fraudulent inducement) so as to satisfy automatically
the conditions of section 104(a)(2), the result would be to
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render superfluous the second Schleier requirement for such
torts, thereby contradicting the Supreme Court’s characterization
of these two requirements as “independent”. Id.
Petitioners’ argument is plainly incorrect, however,
proceeding as it does from a faulty premise that a tort-based
cause of action for fraudulent inducement protects only
inherently personal rights, such as dignitary rights. It is
hornbook law that torts generally encompass not just invasions of
personal dignitary rights but any “civil wrong, other than breach
of contract, for which the court will provide a remedy in the
form of an action for damages.” Keeton et al., Prosser & Keeton
on the Law of Torts, sec. 1, at 2 (5th ed. 1984). More
particularly, although the tort of fraud might involve personal
injury, it generally involves “‘injury to property rather than to
person’”. Food Fair, Inc. v. Anderson, 382 So. 2d 150, 154 (Fla.
Dist. Ct. App. 1980) (quoting 37 Am. Jur. 2d, Fraud and Deceit,
sec. 292 (1968)). In a fraudulent inducement claim, “‘Generally,
the plaintiff’s loss is a purely economic loss’”. HTP, Ltd. v.
Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238, 1240 (Fla.
1996) (quoting with approval from the dissent in Woodson v.
Martin, 663 So. 2d 1327, 1330 (Fla. Dist. Ct. App. 1995), revd.
685 So. 2d 1240 (Fla. 1996)).
Consequently, contrary to petitioners’ argument and
consistent with the two-prong test enunciated in Schleier, the
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mere fact that petitioner’s underlying cause of action against
USI was based on the tort of fraudulent inducement does not in
and of itself satisfy the independent requirement that
petitioners must show that the damages received were on account
of personal injuries or sickness.
The Court of Appeals in Fabry v. Commissioner, 223 F.3d at
1270, concluded, on the basis of its review of relevant Supreme
Court and other judicial precedents, that to qualify for the
exclusion under section 104(a)(2), “a cause and effect
relationship must be established between the tort, the personal
injury resulting, and the amount received in settlement.” Thus,
in a nonphysical personal injury case:
each element of the tort settlement must be examined to
determine whether there is a direct causal link between
such element and an intangible element of the injury
(i.e., emotional distress, pain and suffering, loss of
reputation, etc.). If such a link is found, it would
seem to satisfy Schleier and payments received for such
damage, including losses of earning capacity and the
like, would be excludable. [Id.; emphasis added.]
In a footnote, the Court of Appeals observed that the
Supreme Court in Schleier, in requiring such a causal analysis,
“did not explain exactly what the link was nor how close the link
must be for a recovery to qualify for a IRC sec. 104(a)(2)
exclusion.” Id. at 1266 n.16. The Court of Appeals noted,
however, that in holding that damages received in settlement of
an age discrimination claim under the Age Discrimination in
Employment Act of 1967 were not excludable under section
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104(a)(2), the Supreme Court in Schleier had concluded that
although the taxpayer’s “unlawful termination may have caused him
some pain, suffering and emotional distress such as that suffered
by an automobile accident victim, no personal injury had been
suffered affecting the amount of back wages recovered.” Id. at
1267 (emphasis added). The Court of Appeals further noted that
in O’Gilvie v. United States, 519 U.S. 79 (1996), the Supreme
Court had revisited, in the context of an award of punitive
damages, the causal analysis mandated by Schleier and had
rejected a “but-for” causal analysis in favor of an
“interpretation under which only those damages were excludable
that were awarded ‘by reason of’ or ‘because of’ the personal
injuries.” Fabry v. Commissioner, 223 F.3d at 1269 n.25. The
Court of Appeals stated:
O’Gilvie is consistent with Schleier because punitive
damages do not bear the direct causal link with the
victim’s personal injury since the amount of punitive
damages awarded generally varies positively with the
degree of the tortfeasor’s conduct, not with the extent
of the injury sustained. * * * [Id. at 1270 n.25;
emphasis added.]
On the basis of the Court of Appeals’ analysis in Fabry of
these Supreme Court precedents, then, it would appear that the
“direct causal link” between damages awarded and personal
injuries sustained depends, at least in part, on whether personal
injuries sustained affected the amount of damages received. As
previously discussed, petitioners have failed to show that the
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amount of damages petitioner received on his fraudulent
inducement claim was affected by any personal injuries that he
might have suffered.
In the USI litigation, the jury awarded petitioner $8.1
million in compensatory fraud damages but only $1 on his breach
of contract claim. From this circumstance, petitioners would
have us deduce that the entire $8.1 million fraud damages award
was for noneconomic, personal injuries. Their argument on
supplemental brief is as follows:
Clearly, the jury understood Mr. Gregg’s contract
claim, but elected to award damages to Mr. Gregg for
his personal injury, not any injury to an economic,
contract, or property right he possessed. The fact
that Mr. Gregg was awarded nominal damages on his
contract claim indicates that the jury intended the
fraud damages to compensate some other injury.
Petitioners’ argument is a non sequitur. Implicit in their
argument is an assumption that damages awarded on a fraudulent
inducement claim cannot compensate for economic losses--a
proposition for which petitioners cite no authority and which, as
previously discussed, is contrary to Florida jurisprudence. See
HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., supra at 1238;
Woodson v. Martin, 685 So. 2d 1240 (Fla. 1996). The fact that
the same measure of damages might have been employed under the
breach of contract claim does not preclude the tort remedy to
recover economic losses. See La Pesca Grande Charters, Inc. v.
Moran, 704 So. 2d 710, 712 (Fla. Dist. Ct. App. 1998). It seems
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most likely that in awarding only $1 on the breach of contract
claim, the jury was simply following the trial judge’s
instructions to avoid awarding duplicate damages.3
As an alternative to their principal argument that the
entire $8.1 million of compensatory fraud damages was on account
of personal injuries, petitioners argue on supplemental brief
that these damages should be allocated between damages for
personal and nonpersonal injuries. In an attempt to align
themselves with the “unique facts” of Fabry,4 petitioners argue
that the Court of Appeals’ decision in Gregg v. U.S. Indus.,
Inc., 887 F.2d 1462 (11th Cir. 1989), must be read as limiting
petitioner’s economic damages on the fraudulent inducement claim
to no more than $5.6 million, thereby relegating $2.5 million of
the total $8.1 million fraud damages to noneconomic losses.
3
The jury instructions in the second jury trial stated:
You should consider the fraud claim and the breach
of contract claim as separate and distinct claims;
however, any damages you may award on one of these
claims may not be included in the damages on the other
claim.
4
In Fabry v. Commissioner, 223 F.3d at 1270, the Court of
Appeals noted that after the tortfeasor had paid the taxpayers
$3.3 million to restore the lost value of their “business qua
business * * * something intangible remained.” The Court of
Appeals concluded that under the “unique facts” of Fabry, the
additional $500,000 that was allocated to business reputation
represented compensation for this “something intangible”, which
the Court of Appeals concluded was for personal injuries. Id.
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Petitioners’ alternative argument is without merit. Their
characterization of the Court of Appeals’ opinion in Gregg v.
U.S. Indus., Inc., supra, is (viewed charitably) inaccurate.
After the jury awarded petitioner $8.1 million on his fraudulent
inducement cause of action, USI appealed the verdict to the Court
of Appeals for the Eleventh Circuit, arguing that the trial court
had erred in instructing the jury to measure damages on an “out-
of-pocket” rather than a “benefit of the bargain” basis. Id. at
1465. USI argued that, under a “benefit of the bargain”
approach, the maximum amount that petitioner could have recovered
for the fraud was $5.6 million--or $2.5 million less than the
$8.1 million that the jury actually awarded him. The Court of
Appeals rejected USI’s argument, however, and held that there was
no error in the jury’s use of the out-of-pocket measure of
damages. See id. at 1467.
In seeking to rely upon Gregg v. U.S. Indus., Inc., supra,
petitioners seem to have confused the rejected argument advanced
by USI with the holding of the Court of Appeals. In fact, the
Court of Appeals’ holding bolsters the view that the fraud
damages represented compensation for petitioner’s economic losses
rather than for any personal injury. The Court of Appeals
stated:
The jury assessed the evidence presented regarding the
value of Gregg’s companies prior to the closing with
USI and awarded Gregg an out-of-pocket amount of
damages representing that value less the value of the
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stock he received from USI. This approach restored
Gregg to the position he was in prior to his dealings
with USI; a measure wholly consistent with the dictates
of Florida law. * * * [Id. at 1467.]
In sum, petitioners have failed to carry their burden to
“show that the damages were received ‘on account of personal
injuries or sickness.’” Commissioner v. Schleier, 515 U.S. at
337. Accordingly, we adhere to our original conclusion that
petitioners have failed to prove that the compensatory damages
awarded on the fraudulent inducement cause of action were
received on account of personal injuries within the meaning of
section 104(a)(2).
Petitioner’s Compensatory Damages for Tortious Interference With
a Business Relationship
Petitioners present similar conclusory arguments to support
their contention that the $43,050 jury award for tortious
interference with a business relationship was received on account
of personal injury. Their primary argument parallels an argument
that we have previously considered and rejected in the context of
petitioner’s damages award for fraudulent inducement:
petitioners argue that injuries suffered as a result of tortious
interference with business relationships are “inherently
personal, dignitary injuries.” Thus, petitioners contend that
the entire jury award on this cause of action is excludable under
section 104(a)(2).
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As previously discussed, damages received in a tort action
may be excluded from income only when received on account of
personal injuries or sickness. As noted in our original opinion,
tortious interference with a business relationship is part of a
larger body of tort law aimed at protecting relationships, some
economic (for example, interference with prospective economic
advantage) and some personal (for example, interference with
family relations, or libel and slander). Keeton et al., Prosser
& Keeton on the Law of Torts, sec. 129, at 978 and nn.5 and 6
(5th ed. 1984). Petitioners have failed to demonstrate that the
jury award for tortious interference with a business relationship
was on account of anything other than injury to petitioner’s
economic relationship with his bank.
Petitioners’ reliance on Noel v. Commissioner, T.C. Memo.
1997-113 (holding that part of a settlement payment attributable
to a tortious interference claim was on account of personal
injuries), is misplaced. In Noel, the evidence before the Court
indicated that the tortfeasor’s actions caused the taxpayer to
suffer emotional distress and damage to his business reputation,
that the taxpayer discussed these damages with the tortfeasor
during the settlement negotiations, and that the payment by the
tortfeasor was intended partly to cover this tort claim.
The only evidence petitioners cite to support their argument
that the tortious interference award was on account of personal
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injuries consists of certain remarks that petitioner’s counsel
made in closing arguments in the third jury trial. Although
petitioners have neglected to favor us with citations to the
record source of these remarks (which petitioners have
paraphrased on brief), our independent perusals of the lengthy
record have brought to light the following remarks in closing
arguments in the USI litigation, which we infer are the remarks
upon which petitioners seek to rely:
USI interfered * * * with * * * [petitioner’s]
relationship [with the Leesburg Bank], because after it
learned that the dividends had been assigned to the
bank, it wouldn’t let the dividends go to the bank.
They just hid them, sat on them like a dog in a manger.
They couldn’t cash them, they just held them. Well, we
know that that caused problems with Gregg’s
relationship with the bank. Thereafter, when he tried
to make loans, he was turned down by the bank. We
can’t tell you what the damage amount is, but they
damaged him, they wronged him and the damages should be
one dollar nominal damages.
* * * * * * *
The one dollar on the interference claim will justify
your going into the punishment aspect of it and then
you can allow punitive damages that will get their
attention.
From these remarks, it seems clear that the injury
complained of was to petitioner’s business relationship with the
Leesburg Bank and to his prospective economic advantage in being
able to borrow money there.
Ultimately, the jury returned a verdict awarding petitioner
$43,050 compensatory damages and $18.5 million punitive damages,
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which the trial judge remitted to $2 million. On supplemental
brief, petitioners argue: “The lack of any direct correlation
between the amount of damages and any identifiable economic
injury confirms that the jury intended to compensate Mr. Gregg
for his intangible personal injury.” As we discussed in our
original opinion, however, petitioner’s trial brief in the USI
litigation equated petitioner’s tortious interference claim to
one for “wrongful detention or attachment of property” and
advocated computing damages by reference to petitioner’s economic
loss occasioned when the Leesburg Bank sold the USI stock at a
depressed value to satisfy petitioner’s outstanding loans. The
opinion of the Court of Appeals in the USI litigation, in
affirming the $43,050 jury award for tortious interference,
confirms this direct correlation between the amount of damages
awarded by the jury and petitioner’s economic injury:
Gregg also presented evidence “that reasonable and
fair-minded men in the exercise of impartial judgment
might reach different conclusions” concerning the
damages he suffered as a result of USI’s interference
with his business relationship with the Leesburg bank.
Gregg introduced evidence that because USI refused to
pay his dividends to the Leesburg Bank, the bank was
required to sell Gregg’s stock, which was declining in
value, to satisfy his loans. Gregg also testified at
trial that he was unable to obtain loans from the
Leesburg Bank following USI’s actions in refusing to
disburse the declared dividends. This testimony was
not objected to nor contradicted by USI.
The jury, in considering all the evidence
presented over several days of trial and all the
reasonable inferences to be drawn from that evidence,
including Gregg’s uncontroverted testimony, could find
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that USI’s actions regarding the dividends and the
Leesburg Bank caused Gregg damage. In addition, the
jury could have determined that had USI released the
dividends, the Leesburg Bank would not have liquidated
Gregg’s stock, a drastic measure taken by banks when
loans become undercollateralized or no longer secured
to the bank’s satisfaction, prevention or delay of
which would have been a benefit to Gregg; a benefit
which he was denied, thus causing him damage.
We hold that the evidence in the record supports
the jury’s determination that Gregg established his
claim for tortious interference with his business
relationship. The jury’s award of $43,050 in
compensatory damages was also supported by the range of
the evidence. * * * [Gregg v. U.S. Indus., Inc., 887
F.2d at 1475; citations omitted.]
In sum, the evidence clearly indicates a direct correlation
between petitioner’s damages award for tortious interference and
his economic injuries. Petitioners have failed to show that the
amount of damages was affected by any personal injuries--indeed,
the Court of Appeals’ discussion supra strongly suggests that it
was not. Accordingly, we adhere to our original conclusion that
petitioners have failed to show that the damages awarded for
tortious interference were received on account of personal
injuries or sickness within the meaning of section 104(a)(2).
Prejudgment Interest
In our original opinion, we followed well-established
precedents in holding that petitioner’s award of prejudgment
interest was not excludable from gross income under section
104(a)(2). See Bagley v. Commissioner, 105 T.C. 396, 419 (1995),
affd. 121 F.3d 393 (8th Cir. 1997); Kovacs v. Commissioner, 100
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T.C. 124, 129-130 (1993), affd. per curiam without published
opinion 25 F.3d 1048 (6th Cir. 1994); Rozpad v. Commissioner,
T.C. Memo. 1997-528, affd. 154 F.3d 1 (1st Cir. 1998); see also
Brabson v. United States, 73 F.3d 1040 (10th Cir. 1996). In
Fabry, neither the Tax Court nor the Court of Appeals addressed
the taxation of prejudgment interest. We conclude that nothing
in the Court of Appeals’ remand requires us to reconsider our
findings in this regard.
Decision will be entered
for the same year in the same
amounts as previously entered
in this case.