T.C. Summary Opinion 2003-55
UNITED STATES TAX COURT
EMANOIL AND MAGDALENA GANTEA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6222-02S. Filed May 19, 2003.
Emanoil Gantea, pro se.
James Brian Urie, 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 $4,286 in petitioners’
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue.
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1999 Federal income tax. The issue is whether petitioners may
exclude from gross income under section 104(a)(2) payments
received by petitioner Emanoil Gantea (petitioner) from his
employer pursuant to a settlement agreement. Petitioners resided
in Womelsdorf, Pennsylvania, at the time the petition was filed.
Background
Petitioner was employed with the Dana Corporation (Dana).
Petitioner experienced a work-related injury. Dana sponsored a
program for employees who suffered injuries and are disabled, to
some extent, as a result of work-related injuries. Employees in
the so-called Restricted Duty Program were required to report to
work and remain in a restricted duty area for the entire work
day. Participants in this program were assigned there in lieu of
receiving workers’ compensation benefits.
On March 24, 1995, petitioner, as a member of a class action
suit, filed a complaint in the Pennsylvania Court of Common Pleas
of Berks County alleging three separate causes of action. First,
petitioner alleged that Dana violated the Pennsylvania Wire
Tapping and Electronic Surveillance Control Act, 18 Pa. Cons.
Stat. Ann. sec. 5725 (West 2003), by surreptitiously placing a
video camcorder in the restricted duty area for audio and visual
surveillance of the employees. Second, petitioner alleged that
Dana invaded petitioner’s privacy when Dana posted on a bulletin
board at Dana’s employee information centers documents containing
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a list of all Dana employees participating in the Restricted Duty
Program. These documents also disclosed each employee’s name,
job description, and the specific nature of their injury or
illness. Third, petitioner alleged “Intentional Infliction of
Emotional Distress” when Dana posted, at various locations of the
workplace, cartoons, photographs, and other materials intended to
ridicule, harass, and intimidate employees in the Restricted Duty
Program.
In 1999, petitioner and Dana entered into a settlement
agreement. The settlement agreement stated in pertinent part:
* * * [Petitioner], in a three count Complaint, alleged that
Dana had violated * * * [his] rights under various
Pennsylvania statutes and its common laws including, (i)
violations of the Pennsylvania Wiretapping and Electronic
Surveillance Act (“Wiretap Act”), 18 Pa. Cons. Stat. §§
5701-26 (Supp. 1995); (ii) the common law tort of invasion
of privacy; and (iii) the common law tort of intentional
infliction of emotional distress.
* * * * * * *
1. Payment. Dana will pay a total of thirty
thousand, two hundred and eleven dollars and sixty-six cents
($30,211.66), in exchange for the withdrawal with prejudice
of * * * [petitioner’s] civil action against Dana. Payments
will be made by check, jointly payable to * * * [petitioner]
and his attorney * * *. This amount includes any and all
payment on account of * * * [petitioner’s] attorneys fees.
* * * * * * *
11. Taxes and Reporting. Dana will issue a federal
tax form 1099. As there is no claim for back wages by * * *
[petitioner], Dana will not withhold any taxes on the
settlement proceeds. The parties agree, however, that the
absence of tax withholdings by Dana does not mean that a
taxation authority or authorities may not subsequently treat
the proceeds as taxable income.
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Dana issued petitioner a Form 1099-MISC, Miscellaneous
Income, reporting a payment of $30,211.66 of “nonemployee
compensation”. Petitioners did not report the $30,211.66 damage
award on their 1999 Federal income tax return. Respondent
determined that the damage award should have been included in
petitioners’ gross income. Petitioners have stipulated that “No
portion of the settlement proceeds was paid to petitioner-husband
on account of personal physical injuries or physical sickness.”
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
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
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“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).
“[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
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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.
We start our analysis with the second requirement of
Commissioner v. Schleier, supra. The “taxpayer must show that
the damages were received ‘on account of personal injuries or
sickness.’” Id. at 337. Subsequent to the Court’s opinion in
Schleier, Congress amended section 104(a)2 to provide that
amounts are excludable only if received “on account of personal
physical injuries or physical sickness”. Sec. 104(a)(2)
(emphasis added).
Petitioners stipulated that no portion of the damages was
paid on account of “physical injuries or physical sickness”, and
that should end the matter.
To the extent, however, that petitioners contend that they
should not be bound by the stipulation of facts,3 even if they
had not entered into the stipulation, the result is the same.
2
Small Business Job Protection Act of 1996, Pub. L. 104-
188, sec. 1605, 110 Stat. 1838, effective for amounts received
after Aug. 20, 1996.
3
In their posttrial memorandum, petitioners suggest that
they were unduly pressured into signing the stipulation of facts.
For the reasons stated above, we do not find it necessary to
decide that issue. We note, however, there is nothing in the
record to support that allegation.
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The settlement agreement did not allocate the award to any
specific type of damages. The settlement agreement referenced
the three claims alleged by petitioner in the complaint, and
petitioner alleged that he suffered “extreme humiliation”,
“embarrassment”, and “severe emotional distress” as a result of
Dana’s conduct.
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.” Assuming
petitioner did receive damages for his emotional distress,
humiliation, and embarrassment, that award would not be
excludable under section 104(a)(2). As to his argument that he
received the award on account of personal physical injury, not
only is this argument precluded by the stipulation of facts and
the settlement agreement, but petitioner failed to provide any
documentary or testimonial evidence that Dana compensated him,
through the settlement award, for such an injury.4
We need not address whether “the underlying cause of action
giving rise to the recovery * * * [was] ‘based upon tort or tort
type rights’”, Commissioner v. Schleier, supra at 337, as we find
that the settlement proceeds were not based on personal physical
injuries or sickness. We hold that the $30,211.66 damage award
is not excludable under section 104(a)(2).
4
Sec. 7491(a), concerning burden of proof, has no bearing
on the underlying substantive issue.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.