T.C. Memo. 2007-45
UNITED STATES TAX COURT
LAURA DENISE SEIDEL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24034-04. Filed February 27, 2007.
Laura D. Seidel, pro se.
Jeremy L. McPherson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a $61,546 deficiency
in petitioner’s 2002 Federal income tax and a $1,528 addition to
tax pursuant to section 6654(a),1 as well as additions to tax
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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pursuant to section 6651(a)(1) and (2). After concessions,2 the
issues for decision are (1) whether $157,0003 petitioner received
in connection with a settlement of a lawsuit is excludable from
gross income pursuant to section 104(a)(2), and (2) whether
petitioner is liable for an addition to tax pursuant to section
6654(a).
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 this reference. At the time she filed the
petition, petitioner resided in Yuba City, California.
2
Respondent conceded the sec. 6651(a)(1) and (2) additions
to tax. Respondent also conceded that petitioner paid $10,835
for medical expenses, $6,129 for taxes, $18,911 for interest, and
$1,091 in charitable donations.
3
This amount equals settlement proceeds of $475,000 net of
petitioner’s attorney’s fees, litigation expenses, and the amount
paid to her as wages. In Commissioner v. Banks, 543 U.S. 426
(2005), decided over 10 months before trial in this case, the
Supreme Court held that as a general rule, when a litigant’s
recovery constitutes income, the portion of the recovery paid to
an attorney as a contingent fee is included in the litigant’s
income. At the beginning and the end of the trial, pursuant to
Rule 41(b) respondent orally moved to amend the pleadings to
conform to the evidence (i.e., to treat the entire settlement
proceeds of $475,000 as income). Generally we do not consider
issues that are raised for the first time at trial. See Foil v.
Commissioner, 92 T.C. 376, 418 (1989), affd. 920 F.2d 1196 (5th
Cir. 1990); Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).
Additionally, we denied respondent’s motion as it was prejudicial
to petitioner to allow respondent to amend the pleadings this
late. Respondent had sufficient time to amend the pleadings
before trial.
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In 1978, petitioner was hired by the California State
Automobile Association (now American Automobile Association, or
AAA). She was employed as an insurance claims adjuster and a
bodily injury claims adjuster for more than 20 years. Over the
years, her workload increased, causing her to feel overwhelmed.
Petitioner complained to her supervisors, but very little was
done to address her concerns. As the employment relationship
deteriorated, and work-related stress mounted, petitioner sought
medical attention.
In 1994, petitioner was diagnosed with Attention Deficit
Disorder (ADD) and Obsessive Compulsive Disorder (OCD). In 1998,
petitioner was diagnosed with posttraumatic stress disorder.
These conditions were aggravated by the demands and workload of
petitioner’s position. Again petitioner complained to her
supervisors and requested accommodations from her employer
regarding her condition. These requests were not granted, and
petitioner eventually became totally unable to perform her work
functions. Petitioner took a series of leaves of absence because
she was not able to work under these conditions.
In 2001, petitioner filed a lawsuit against her employer
both in California State court and in the U.S. District Court for
the Eastern District of California. In the District Court,
petitioner alleged three causes of action: (1) Employment
discrimination on account of mental disability in violation of
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the California Fair Employment and Housing Act (FEHA), Cal. Govt.
Code sec. 12940 (2000); (2) employment discrimination in
violation of the Americans with Disabilities Act (ADA), 42 U.S.C.
sec. 12101 (2000); and (3) a State law claim based upon the
failure to compensate for overtime in violation of California
State regulations. In her California State court complaint,
petitioner alleged four causes of action (based upon the same
facts as the District Court case): (1) Discrimination on the
basis of disability and failure to provide reasonable
accommodation for disability, FEHA, Cal. Govt. Code sec. 12940;
(2) failure to provide an environment free of harassment and
discrimination in employment, FEHA, Cal. Govt. Code sec. 12940;
(3) retaliation; and (4) alleged overtime violations on the part
of her employer. In both lawsuits, petitioner prayed for damages
for the loss of wages, of earning capacity, and of benefits of
employment; general damages for emotional distress; incidental
and punitive damages; and reasonable attorney’s fees and costs.
In March of 2002, petitioner and AAA entered into a
“Settlement Agreement and General Release of All Claims” that
settled all claims between petitioner and AAA (settlement
agreement). The settlement agreement resolved the California
State court complaint and the District Court complaint. The
settlement agreement provided payment to petitioner of the
following amounts:
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Payable to petitioner with no $157,000
amounts withheld
Payable to petitioner as wages, 50,000
with payroll tax withheld
Payable to petitioner’s attorneys 268,000
for legal fees and costs with no
amount withheld
Page 3 of the settlement agreement provided that petitioner
“acknowledges that she considers the payment of the check payable
to her without withholdings [the $157,000 payment] to be
compensation for personal injury (i.e. emotional distress)
damages only”.
Respondent issued petitioner a notice of deficiency for 2002
determining that $157,000 of the settlement was not excludable
from her gross income pursuant to section 104(a)(2).
OPINION
I. Deficiency
A. Burden of Proof
Generally, the taxpayer bears the burden of proving the
Commissioner’s deficiency determinations incorrect. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner has
neither claimed nor shown that she satisfied the requirements of
section 7491(a) (to shift the burden of proof to respondent).
Accordingly, petitioner bears the burden of proof. See Rule
142(a).
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B. Section 104
It is well established that, pursuant to section 61(a),
gross income includes all income from whatever source derived
unless otherwise excluded by the Internal Revenue Code. See
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-431 (1955).
Exclusions from gross income are construed narrowly.
Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995).
The Small Business Job Protection Act of 1996 (SBJPA), Pub.
L. 104-188, sec. 1605, 110 Stat. 1838, amended section 104, as
relevant here, to provide:
SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.
(a) In General.--Except in the case of amounts
attributable to (and not in excess of) deductions
allowed under section 213 (relating to medical, etc.,
expenses) for any prior taxable year, gross income does
not include--
* * * * * * *
(2) 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;
* * * * * * *
* * * For purposes of paragraph (2), emotional distress
shall not be treated as a physical injury or physical
sickness. * * *
Section 104 as amended by the SBJPA generally is effective for
amounts received after August 20, 1996. SBJPA sec. 1605(d), 110
Stat. 1839.
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“Damages received” mean amounts 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. In
evaluating whether amounts received pursuant to the settlement
agreement are excludable from income pursuant to section
104(a)(2), we look to the written terms of the settlement
agreement to determine the origin and allocation of the
settlement proceeds. See Metzger v. Commissioner, 88 T.C. 834
(1987), affd. without published opinion 845 F.2d 1013 (3d Cir.
1988); Jacobs v. Commissioner, T.C. Memo. 2000-59, affd. sub nom.
Connelly v. Commissioner, 22 Fed. Appx. 967 (10th Cir. 2001).
Petitioner settled her claims against her former employer
before trial. The parties entered into a written settlement
agreement. The dispute between respondent and petitioner
revolves around the following language in the settlement
agreement: “[Petitioner] acknowledges that she considers the
payment of the check payable to her without withholdings to be
compensation for personal injury (i.e. emotional distress)
damages only”.
The parties agree that this sentence applies to the
$157,000 payment at issue. Petitioner contends that this
language means that the settlement was compensation for personal
injuries including, but not limited to, emotional distress and
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that the abbreviation “i.e.” means “for example”. Respondent
argues that the parenthetical phrase “personal injury (i.e.
emotional distress) damages only” is a limiting phrase and the
abbreviation “i.e.” means “that is”.
“I.e.” is an abbreviation for the Latin phrase “id est”,
which means “that is” or “that is to say”. Black’s Law
Dictionary 746 (6th ed. 1990). Accordingly, we agree with
respondent that the parenthetical phrase in the settlement
agreement limits and defines the phrase “personal injury” to
mean emotional distress only.
Furthermore, the settlement agreement does not contain
language indicating that any portion of the settlement was paid
for a physical injury or physical sickness. Thus, even if the
Court were to accept petitioner’s reading of the settlement
agreement, there is no apportionment of any of the settlement
proceeds to a physical injury or physical sickness.
Accordingly, we conclude that none of the settlement
proceeds of $157,000 is excluded from gross income.
II. Addition to Tax
A. Burden of Production
Section 7491(c) provides that the Commissioner bears the
burden of production with respect to the liability of any
individual for additions to tax. “The Commissioner’s burden of
production under section 7491(c) is to produce evidence that it
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is appropriate to impose the relevant penalty, addition to tax,
or additional amount”. Swain v. Commissioner, 118 T.C. 358, 363
(2002); Higbee v. Commissioner, 116 T.C. 438, 446 (2001). If a
taxpayer files a petition alleging some error in the
determination of an addition to tax, the taxpayer’s challenge
will succeed unless the Commissioner produces evidence that the
addition to tax is appropriate. Swain v. Commissioner, supra at
363-365.
Petitioner challenged the section 6654 addition to tax in
her petition. Accordingly, respondent bears the burden of
production on this issue.
B. Section 6654
Section 6654 provides for an addition to tax in the event of
an underpayment of a required installment of individual estimated
tax. Sec. 6654(a) and (b). Each required installment of
estimated tax is equal to 25 percent of the “required annual
payment”, which is equal to the lesser of (1) 90 percent of the
tax shown on the individual’s return for that year (or, if no
return is filed, 90 percent of his or her tax for such year), or
(2) if the individual filed a return for the immediately
preceding taxable year, 100 percent4 of the tax shown on that
return. Sec. 6654(d)(1)(A) and (B)(i) and (ii). “In order to
4
If the adjusted gross income shown on the return for the
preceding taxable year exceeds $150,000, 100 percent is replaced
with 112 percent for 2001. Sec. 6654(d)(1)(C)(i).
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satisfy his burden of production under section 7491(c) regarding
petitioner’s liability for the section 6654 addition to tax,
respondent, at a minimum, must produce evidence necessary to
enable the Court to conclude that petitioner had a required
annual payment under section 6654(d)(1)(B).” Wheeler v.
Commissioner, 127 T.C. 200, 211 (2006).
Petitioner credibly testified that she filed a return for
2001. Respondent, however, has not provided evidence of the
amount of tax shown on the 2001 return or that petitioner did not
file a return for 2001. Without this information, we cannot
determine the amount of the “required annual payment”.
Therefore, respondent has not met his burden of production
regarding the section 6654 addition, and we conclude that
petitioner is not liable for this addition to tax.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and, to the extent not
mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be
entered under Rule 155.