T.C. Memo. 2003-168
UNITED STATES TAX COURT
ROBERT HENDERSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12135-01. Filed June 9, 2003.
Robert Henderson, pro se.
Linette B. Angelastro, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$1,042 in petitioner’s Federal income tax for 1999.1 After a
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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concession by respondent,2 the issue for decision is whether a
$5,000 payment that Robert Henderson (Mr. Henderson) received in
1999 in settlement of a claim against Morgan, Stanley, Dean
Witter & Co. (Morgan Stanley) is excludable from petitioner’s
gross income under section 104(a)(2). We hold that it is not.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference. At the time he filed the
petition, Mr. Henderson resided in Ojai, California.
A. Petitioner’s Motel Dispute
For a period of time during 1997, Mr. Henderson stayed at a
motel in Monterey, California. To pay for his accommodations,
Mr. Henderson used a credit card called Prime Option issued by
Morgan Stanley. Following a dispute with the motel owner, Mr.
Henderson paid the credit card account balance and canceled the
credit card.
Approximately 10 weeks later in February 1998, the motel
charged Mr. Henderson $780. Morgan Stanley accepted and paid the
$780 charge to Mr. Henderson’s account. Morgan Stanley then
attempted collection from Mr. Henderson. When Mr. Henderson
2
Respondent concedes that petitioner is not liable for
self-employment tax of $706 under sec. 1402(a), reducing
petitioner’s deficiency to $336.
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refused to pay this charge, Morgan Stanley reported to credit
agencies that Mr. Henderson had defaulted on the account.
B. Petitioner’s Lawsuit Against Morgan Stanley
On November 18, 1998, Mr. Henderson filed suit against
Morgan Stanley in the U.S. District Court for the Northern
District of California. On December 6, 1999, the parties reached
a settlement wherein Morgan Stanley agreed to pay Mr. Henderson
$5,000.
C. Settlement Agreement
Mr. Henderson and Morgan Stanley memorialized this
settlement by executing a document entitled “Settlement and
Release Agreement” (settlement agreement). The settlement
provides, in part:
1. [Morgan Stanley] shall pay to [Mr. Henderson] the
total sum of $5,000.
2. Effective upon receipt of the payment referred to
above, [Mr. Henderson] hereby releases and fully
discharges [Morgan Stanley] from any and all
claims, demands, damages, and causes of action
[Mr. Henderson] now has or in the future may have
for detriment alleged in the pending action.
3. [Morgan Stanley] hereby agrees to make a written
request to remove the Prime Option trade line from
the credit reports of the three major credit
agencies in regard to the matters raised in the
pending action.
4. [Morgan Stanley] agrees to arrange to have the
debt attributed to [Mr. Henderson] * * * forgiven.
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The settlement agreement did not allocate the $5,000
settlement payment among monetary, emotional, and physical
damages.
D. 1999 Tax Return
During 1999, Mr. Henderson received $5,000 from Discover
Financial Services, Inc., in settlement of the lawsuit against
Morgan Stanley. On April 15, 2000, Mr. Henderson timely filed
his 1999 Federal income tax return. On his 1999 Federal tax
return, Mr. Henderson excluded from gross income the $5,000
settlement payment. Respondent issued a notice of deficiency to
Mr. Henderson regarding his 1999 tax year. In the notice of
deficiency, respondent determined, inter alia, that petitioner
failed to report taxable compensation of $5,000 for 1999.
OPINION
Petitioner does not dispute receiving the $5,000 settlement
payment in 1999 to settle petitioner’s claim against Morgan
Stanley. Petitioner contends, however, that the $5,000
settlement payment is not taxable because it comes under the
exclusion of section 104(a)(2). Respondent argues that the
$5,000 settlement payment is includable in petitioner’s gross
income for 1999. For the reasons stated below, we agree with
respondent.
Section 61(a) provides that “gross income means all income
from whatever source derived” except as otherwise provided. The
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definition of gross income is broad in scope, Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955), and exclusions
from gross income are narrowly construed, United States v. Burke,
504 U.S. 229, 248 (1992); United States v. Centennial Sav. Bank
FSB, 499 U.S. 573, 583 (1991).
Respondent’s determinations in the notice of deficiency are
presumed correct, and petitioner must prove those determinations
wrong in order to prevail.3 Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933). As relevant to the present case, 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”.4
The term “damages received” means an amount received “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.” Sec. 1.104-1(c), Income Tax Regs.
Section 104(a) further provides that “emotional distress shall
3
Petitioner does not contend that sec. 7491(a) is
applicable to this case.
4
The Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1605, 110 Stat. 1838 (1996 amendment), amended sec.
104(a)(2) to narrow the exclusion for personal injury damages
received pursuant to a judgment or settlement, effective for
amounts received after Aug. 20, 1996. Under the 1996 amendment,
personal injury or sickness must be physical in nature.
Moreover, the amendment explicitly excepts punitive damages from
the exclusion provided by sec. 104(a)(2).
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not be treated as a physical injury or physical sickness” for
purposes of section 104(a)(2) (except for damages not in excess
of the amount paid for medical care attributable to emotional
distress). Prasil v. Commissioner, T.C. Memo. 2003-100.
According to the legislative history of section 104(a)(2), “the
term emotional distress includes symptoms (e.g., insomnia,
headaches, stomach disorders) which may result from such
emotional distress.” H. Conf. Rept. 104-737, at 301 n.56 (1996),
1996-3 C.B. 741, 1041 n.56.
Generally, damages are excludable from gross income if they
satisfy two requirements. The Supreme Court in Commissioner v.
Schleier, 515 U.S. 323, 336 (1995), established those
requirements as:
First, the taxpayer must demonstrate that the
underlying cause of action giving rise to the recovery
is ‘based upon tort or tort type rights’; and second,
the taxpayer must show that the damages were received
‘on account of personal injuries or sickness.’ * * *
The U.S. Court of Appeals for the Ninth Circuit, the court
to which this case is appealable, held prior to the amendment of
section 104(a)(2) that defamation may be considered a personal
injury for purposes of section 104(a)(2). Roemer v.
Commissioner, 716 F.2d 693 (9th Cir. 1983), revg. 79 T.C. 398
(1982). However, the amendment to section 104(a)(2), which does
not otherwise change the section 104(a)(2) analysis set forth in
Schleier, now requires that the payments be “on account of
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personal physical injuries or physical sickness” for payments
made after August 20, 1996.
In the instant case, petitioner received the $5,000
settlement payment pursuant to a settlement agreement with Morgan
Stanley. When damages 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, supra at 237. The
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 on another issue 70 F.3d 34 (5th Cir. 1995),
and cases cited therein. If the settlement agreement lacks
express language stating what the settlement amount was paid to
settle, we look to the intent of the payor, based on all the
facts and circumstances of the case, including the complaint
filed and details surrounding the litigation. Knuckles v.
Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C.
Memo. 1964-33; Robinson v. Commissioner, supra at 127. If a
settlement is attributable to claims based on tort or tort type
rights as well as other rights, it may be necessary to determine
which portion of the settlement is attributable to damages
received based on tort or tort type rights. Similarly, it may be
necessary to determine which portion, if any, of the settlement
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may be attributable to damages received for personal physical
injuries or physical sickness.
In the present case, we find petitioner meets the first part
of the Schleier test, having brought a tort type action against
Morgan Stanley alleging harm to his credit reputation. We now
turn to the question of whether the $5,000 settlement payment was
received on account of a personal physical injury or physical
sickness. Petitioner asserts that Morgan Stanley paid the $5,000
settlement payment to petitioner as a result of damage he
suffered to his credit reputation. The record, however, is
devoid of specific information indicating that Morgan Stanley
issued the settlement payment on account of damage to
petitioner’s credit reputation. We are not required to, and do
not, accept petitioner’s self-serving testimony without
corroborating evidence. Lerch v. Commissioner, 877 F.2d 624,
631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger v.
Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per
curiam T.C. Memo. 1969-159; Tokarski v. Commissioner, 87 T.C. 74,
77 (1986). Further, the record does not support a conclusion
that petitioner’s harm constitutes a physical injury or a
physical sickness caused by the conduct of Morgan Stanley. On
brief, petitioner alleged that he suffers from a “life-
threatening, pre-existing physical illness” exacerbated by the
harm to his personal reputation. Assertions on briefs are not
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evidence. Rule 143(b); Davis v. Commissioner, T.C. Memo. 1997-
80.
Even assuming arguendo that petitioner suffered from a
personal physical injury or physical sickness, the record does
not support the conclusion that petitioner received the $5,000
settlement payment on account of such physical injury or physical
sickness. According to the settlement agreement, petitioner
released “any and all claims” against Morgan Stanley in exchange
for $5,000. The settlement agreement, however, did not
specifically carve out any portion of the settlement payment as a
settlement on account of personal physical injury or physical
sickness, let alone make reference to a physical injury or a
physical sickness resulting from any reputation damage by Morgan
Stanley.
The settlement agreement did not allocate any part of the
settlement payment on account of a personal physical injury or
physical sickness. Furthermore, the evidence in the record does
not support such an allocation. Accordingly, we conclude that no
portion of the $5,000 settlement payment was compensation for a
personal physical injury or physical sickness. Therefore, we
sustain respondent’s determination in this regard.
We have considered all of the other arguments made by the
parties and, to the extent that we have not specifically
addressed them, we conclude they are without merit.
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To reflect the foregoing,
Decision will be
entered for respondent.