T.C. Summary Opinion 2003-14
UNITED STATES TAX COURT
VIRGIE R. PORTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8842-01S. Filed February 25, 2003.
Virgie R. Porter, pro se.
Kathleen C. Schlenzig, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 74631 of the Internal Revenue Code
in effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority.
Respondent determined a deficiency of $17,641 and an
accuracy-related penalty under section 6662(a) of $3,528 in
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue.
- 2 -
petitioner’s 1998 Federal income tax. The issues are (1) whether
petitioner may exclude from gross income under section 104(a)(2)
payments received from her former employer pursuant to a
settlement agreement, and (2) whether petitioner is liable for
the accuracy-related penalty under section 6662(a). Petitioner
resided in Evergreen Park, Illinois, at the time the petition was
filed.
Background
Dobbs International Services (Dobbs) hired petitioner in
April of 1993 as a service employee at O’Hare International
Airport. Every October, Dobbs required all employees to “bid”
for job positions with the company. The bidding process was
based on seniority, and Dobbs granted the most senior employees
the right to bid for a job position first. Petitioner alleged
that in October of 1993, a manager at Dobbs granted a male
employee, with less seniority than petitioner, the right to bid
for petitioner’s job position before her. As a result,
petitioner lost her position as service employee, and Dobbs
placed her in an on-call position.
Petitioner filed her first complaint with the Equal
Employment Opportunity Commission (EEOC) on December 8, 1993.
The complaint stated in part:
III. I believe that I have been discriminated against on the
basis of my sex, female, in violation of Title VII of the
1964 Civil Rights Act, in that I was denied the opportunity
to bid on a position for which male employees were allowed
- 3 -
to bid, and in that [Dobbs] stated that certain positions
are not available to females.
On June 23, 1994, while petitioner was in the on-call
position, Dobbs asked her to report to work. At that assignment,
petitioner slipped on grease, dislocating her shoulder and
injuring her lower back. Petitioner filed a workmen’s
compensation claim against Dobbs as a result of her injuries. In
August of 1995, Dobbs agreed to pay petitioner $5,820.96 in
settlement of that claim.
Subsequently while petitioner was on-call, Dobbs attempted
to notify petitioner that work was available. After failing to
reach her by telephone, Dobbs terminated petitioner. Petitioner
filed a second complaint with the EEOC on March 14, 1995. The
complaint stated in part:
III. I believe that I have been discriminated against
because of my sex, female in violation of Title VII of the
Civil Rights Act of 1964, as amended, and retaliated against
in violation of 704(a) of the Act, in that I had filed a
previous charge of discrimination and am treated different
than male employees. Male employees have been placed on the
on-call list and on lay off and were not terminated while on
this list due to lack of contact.
On October 7, 1998, Dobbs and petitioner entered into a
settlement agreement. The settlement agreement stated in part:
An investigation having been made under Title VII of the
Civil Rights Act of 1964, as amended (Title VII), by the
U.S. Equal Employment Opportunity Commission (EEOC) and
reasonable cause having been found, the parties do resolve
and conciliate this matter as follows:
* * * * * * *
- 4 -
CHARGING PARTY RELIEF
[Dobbs] agrees that within 30 days of the effective
date of this Agreement it shall:
1. a. Pay to the Charging Party the sum of twelve
thousand dollars ($12,000.00) as back wages, less legal
deductions for taxes;[2]
b. Pay to the Charging Party the sum of seventy-
one thousand and six hundred dollars ($71,600.00) as
damages. Charging Party shall be liable for any and all
taxes which may be due for this payment.
In preparing her 1998 Federal income tax return, petitioner
excluded the $71,600 damage award that she received. Petitioner
argues that the damage award is excludable from her gross income
under section 104(a)(2) because it was received on account of her
physical personal injury.
Discussion
Section 61 provides that “gross income means all income from
whatever source derived”. Gross income is an inclusive term with
broad scope, designed by Congress to “exert * * * ‘the full
measure of its taxing power.’” Commissioner v. Glenshaw Glass
Co., 348 U.S. 426, 429 (1955) (quoting Helvering v. Clifford, 309
U.S. 331, 334 (1940)). Conversely, statutory exceptions from
income shall be narrowly construed. Commissioner v. Schleier,
515 U.S. 323, 328 (1995). Furthermore, “exemptions from taxation
2
The taxability of the $12,000 petitioner received as back
wages is not in dispute.
- 5 -
are not to be implied; they must be unambiguously proved.”
United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988).
Section 104(a)(2) excludes from gross income “the amount of
any damages (other than punitive damages) received (whether by
suit or agreement and whether as lump sums or as periodic
payments) on account of personal physical injuries or physical
sickness”. Section 1.104-1(c), Income Tax Regs., defines
“damages received” as “an amount received (other than workmen’s
compensation) 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.” Amounts are
excludable from gross income only when (1) the underlying cause
of action giving rise to the recovery is based on tort or tort
type rights, and (2) the damages were received on account of
personal injuries or sickness. Commissioner v. Schleier, supra
at 337.
Where amounts are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement controls whether such amounts are excludable under
section 104(a)(2). United States v. Burke, 504 U.S. 229, 237
(1992). Determination of the nature of the claim is a factual
inquiry and is generally made by reference to the settlement
agreement. Robinson v. Commissioner, 102 T.C. 116, 126 (1994),
affd. in part and revd. in part 70 F.3d 34 (5th Cir. 1995).
- 6 -
“[W]here an amount is paid in settlement of a case, the critical
question is, in lieu of what was the settlement amount paid”.
Bagley v. Commissioner, 105 T.C. 396, 406 (1995), affd. 121 F.3d
393 (8th Cir. 1997). An important factor in determining the
validity of the agreement is the “intent of the payor” in making
the payment. Knuckles v. Commissioner, 349 F.2d 610, 613 (10th
Cir. 1965), affg. T.C. Memo. 1964-33. If the payor’s intent
cannot be clearly discerned from the settlement agreement, the
intent of the payor must be determined from all the facts and
circumstances of the case, including the complaint filed and
details surrounding the litigation. Robinson v. Commissioner,
supra at 127.3
In Laber v. Commissioner, T.C. Memo. 1997-559, the taxpayer
filed eight EEOC complaints against his former employer. The
settlement agreement did not allocate the damage award, nor did
the taxpayer allege in any of the eight complaints personal
injury or sickness that occurred as a result of the alleged
discrimination. We held the settlement award was not excludable
under section 104(a)(2). Id.
Similarly, petitioner did not allege physical injury or
sickness in her complaints filed with the EEOC. Petitioner,
however, argues that the $71,600 damage award represented
3
Sec. 7491(a), concerning burden of proof, has no bearing
on the underlying substantive issue. Respondent has satisfied
the burden of production with respect to the accuracy-related
penalty under sec. 6662. See sec. 7491(c).
- 7 -
compensation for her personal physical injury in that she
suffered “pain and suffering from not being able to pay my bill,
not being able to work and knowing the fact that I was
discriminated against”. Further, petitioner argues that the
damage award was additional compensation for her injuries when
she slipped on grease at work. Petitioner reasons that, if Dobbs
had not sexually discriminated against her, Dobbs would not have
placed her on the on-call list and assigned her to a position
where she received physical injuries.
The flush language of section 104(a) provides that “For
purposes of paragraph (2), emotional distress shall not be
treated as a physical injury or physical sickness.” Thus,
assuming petitioner did receive damages for her pain and
suffering as a result of the employment discrimination, they
would not be excludable under section 104(a)(2). As to her
personal physical injury, Dobbs compensated petitioner in a
separate workmen’s compensation claim brought by her, and we
decline to follow petitioner’s tenuous nexus between the
discrimination and the personal injury.
We find that petitioner failed to establish that any amount
of the settlement proceeds was based on personal physical
injuries or sickness, and, thus, hold that the $71,600 damage
award is not excludable under section 104(a)(2).
- 8 -
Section 6662 imposes an accuracy-related penalty “equal to
20 percent of the portion of the underpayment” of tax
attributable to “Any substantial understatement of income tax.”
Sec. 6662(a) and (b)(2). A substantial understatement of income
tax exists if the amount of the understatement for the taxable
year exceeds the greater of 10 percent of the tax required to be
shown on the return for the taxable year, or $5,000. Sec.
6662(d)(1)(A).
However, “No penalty shall be imposed * * * if it is shown
that there was a reasonable cause * * * and that the taxpayer
acted in good faith”. Sec. 6664(c). Petitioner failed to
address the accuracy-related penalty at trial and offered no
evidence that she had reasonable cause for the understatement or
acted in good faith. Accordingly, we sustain respondent’s
determination.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.