T.C. Summary Opinion 2007-51
UNITED STATES TAX COURT
THOMAS ANDREW AND DIANE KOERNER CAMPBELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7830-05S. Filed March 28, 2007.
Thomas Andrew and Diane Koerner Campbell, pro se.
Scott A. Hovey, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code of 1986, as amended
and in effect for the year in issue, and Rule references are to
the Tax Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency of $701 in petitioners’
2002 Federal income tax. After concessions by petitioners,2 the
issue is whether petitioners are entitled, under section
104(a)(2), to exclude from gross income a payment received by
petitioner Diane Koerner Campbell (Mrs. Campbell) from her
employer pursuant to an order of the Merit Systems Protection
Board.
Petitioners resided in Centreville, Virginia, at the time
their petition was filed. This case was submitted fully
stipulated under Rule 122.
Background
In 1990, Mrs. Campbell was employed by the Department of
Treasury, Office of Thrift Supervision (OTS), in a supervisory
position as a grade 13, Chief, Editorial Services Branch.
In 1990, OTS, in preparation for implementing a new pay-
banding system, standardized their then current job descriptions.
As part of this standardization, Mrs. Campbell was removed from a
supervisory position and assigned to a nonsupervisory position as
a “Writer/Editor”. As a result of this reclassification, Mrs.
2
Petitioners concede they omitted $878 of interest income
from gross income and that they are liable for the additional tax
under sec. 72(t) of $54 for an early distribution from a
qualified retirement plan.
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Campbell was paid under the same grade as individuals she
formerly supervised and who were previously paid at a lower
grade.
Mrs. Campbell appealed the reclassification of her position
to the Merit Systems Protection Board (MSPB). As the sole basis
for her appeal, Mrs. Campbell argued that because the
reclassification of her position from supervisory to
nonsupervisory resulted in a reduction in grade, OTS should have
followed the Office of Personnel Management (OPM) reduction-in-
force (RIF) procedures contained in 5 C.F.R. pt. 351 (1990), when
effecting its reorganization. Mrs. Campbell argued that because
OTS did not follow the RIF regulations, the MSPB should vacate
the agency action and award her compensatory damages, including
lost wages and benefits she would have been entitled to had she
retained her position. Mrs. Campbell did not raise any other
basis for relief from the adverse agency action with the MSPB.
On February 28, 1994, the MSPB issued a final order (the
Order) resolving Mrs. Campbell’s dispute with OTS. In the Order,
the MSPB found that Mrs. Campbell was demoted as a result of
OTS’s reclassification of her position and that Mrs. Campbell’s
demotion constituted an appealable RIF action. The MSPB found
that because OTS did not follow the RIF regulations in effecting
Mrs. Campbell’s demotion, the demotion could not be sustained.
Based on these findings, the MSPB ordered OTS to cancel Mrs.
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Campbell’s demotion and to restore her to her previous position
effective December 12, 1990. The MSPB further ordered OTS to
issue a check to Mrs. Campbell “for the appropriate amount of
back pay, interest on back pay, and other benefits under the
Office of Personnel Management’s regulations”.
Prior to the date the Order was issued by the MSPB, Mrs.
Campbell transferred employment first to the General Services
Administration (GSA) and then to the Federal Deposit Insurance
Corporation (FDIC). As a result of these transfers, the Federal
Government was required to satisfy its obligations under the
Order from separate agency funds. Mrs. Campbell received
payments under the Order from OTS, GSA, and the FDIC.
At some point not disclosed in the record, Mrs. Campbell
disputed whether payments from the FDIC reflected the total
amount the agency was obligated to pay her under the Order. In
2002, the FDIC and Mrs. Campbell agreed that she was due a final
payment of $1,446 under the Order. Thereafter, the FDIC issued a
check in that amount to Mrs. Campbell and reported the payment to
petitioners and respondent on a Form 1099-MISC, Miscellaneous
Income. The FDIC did not withhold FICA tax, Federal income tax,
or State income tax from the gross amount of the payment.
Petitioners did not include the $1,446 payment from the FDIC
in gross income on their timely filed 2002 Form 1040, U.S.
Individual Income Tax Return. Respondent determined that the
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$1,446 payment from the FDIC should have been included in
petitioners’ 2002 gross income and increased petitioners’ taxable
income by that amount to reflect the payment. Petitioners assert
the payment, which represents “compensatory damages resulting
from the litigation of a constitutional tort (unlawful
demotion)”, is excludable from gross income under section
104(a)(2).
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)). Compensation for services is enumerated
among the items of income included under section 61, as is
interest. Sec. 61(a)(1), (4); secs. 1.61-2(a)(1), 1.61-7(a),
Income Tax Regs.
Statutory exclusions from income are matters of legislative
grace and are narrowly construed. Commissioner v. Schleier, 515
U.S. 323, 328 (1995); Mostowy v. United States, 966 F.2d 668, 671
(Fed. Cir. 1992). Further, “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). Taxpayers seeking an
exclusion from income must demonstrate they are eligible for the
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exclusion and bring themselves “within the clear scope of the
exclusion.” Dobra v. Commissioner, 111 T.C. 339, 349 n.16
(1998).3
Section 104(a)(2), as in effect prior to its amendment in
1996,4 excludes from gross income “any damages received (whether
by suit or agreement and whether as lump sums or as periodic
payments) on account of personal injuries or 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.”
For purposes of applying the above statutory and regulatory
text, the Supreme Court has established a two-pronged test for
ascertaining a taxpayer’s eligibility for the section 104(a)(2)
exclusion: “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
3
Because we decide the issue in this case without regard
to the burden of proof, sec. 7491 is inapplicable.
4
Sec. 104(a)(2) was amended by the Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat.
1755, 1838-1839, to exclude only amounts received on account of
personal physical injuries or physical sickness. We apply the
statute as in effect prior to the amendment because the Order,
pursuant to which the payment at issue was made, was issued by
the MSPB before Sept. 13, 1995. See id. sec. 1605(d)(2), 110
Stat. 1839.
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show that the damages were received ‘on account of personal
injuries or sickness.’” Commissioner v. Schleier, supra at 337;
see also Hemelt v. United States, 122 F.3d 204, 208 (4th Cir.
1997) (quoting above passage from Schleier as the “basic test
* * * for determining whether an award may fairly be
characterized as personal injury damages” that fall within the
section 104(a)(2) exclusion).5
In the instant case, petitioners make a series of arguments
to support their assertion that the backpay and interest on the
backpay awarded by the MSPB are really an award of damages for a
personal injury suffered by Mrs. Campbell as a result of her
“unlawful demotion”. Primarily, they argue that, based on United
States v. Burke, 504 U.S. 229 (1992), when damages are awarded, a
taxpayer need only prove that the underlying claim was based on
“tort or tort type rights” for the damages to be excludable under
section 104(a)(2). In such a case, according to petitioners,
there is no need for a discussion of whether the requirements of
personal injury were met. Because Mrs. Campbell’s “unlawful
demotion” was a tort, which petitioners alternatively
characterize as a “workplace”, an “abuse of process”, and a
5
Interest received on damage awards must be included in
gross income under sec. 61, even under circumstances in which the
underlying damages are excludable under sec. 104(a)(2). Rozpad
v. Commissioner, 154 F.3d 1 (1st Cir. 1998), affg. T.C. Memo.
1997-528; Brabson v. United States, 73 F.3d 1040 (10th Cir.
1996); Kovacs v. Commissioner, 100 T.C. 124 (1993), affd. without
published opinion 25 F.3d 1048 (6th Cir. 1994).
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“public policy” tort, and that tort caused a reduction in pay,
all damages received “on account of” that tort by Mrs. Campbell
are excludable from income under section 104(a)(2), as it existed
pre-1996.
Respondent disputes petitioners’ characterization of Mrs.
Campbell’s demotion without benefit of the RIF regulations as a
tort and argues that because the only remedy available to an
employee for an agency’s violation of the RIF regulations is
reinstatement and appropriate backpay, her cause of action
against OTS was not based on “tort or tort type rights” under the
definition enunciated by the Supreme Court in Commissioner v.
Schleier, supra, and United States v. Burke, supra. Respondent
further argues that, assuming that Mrs. Campbell’s claim against
OTS was based on tort or tort type rights, the ordered
restoration of her former pay grade coupled with back wages and
lost benefits was not awarded on “account of personal injuries or
sickness”, within the meaning of section 104(a)(2), as
interpreted by the Supreme Court.
We agree with respondent that the backpay and the interest
on the backpay awarded by the MSPB were not attributable to any
personal injuries or sickness suffered by Mrs. Campbell. Because
we find that the payment in question was not received by Mrs.
Campbell “on account of personal injuries or sickness”, as
required by section 104(a)(2) and the second prong of the Supreme
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Court’s test in Commissioner v. Schleier, supra at 337, we need
not decide whether the underlying claim giving rise to the award,
i.e., OTS’s violation of the RIF regulations in effecting Mrs.
Campbell’s demotion, involved tort or tort type rights.6
In deciding whether damages were received “on account of
personal injuries or sickness”, the Supreme Court has construed
section 104(a)(2) to require that a damage award be more than
6
For the sake of completeness, we note that petitioners’
contention that, under the Supreme Court’s opinion in United
States v. Burke, 504 U.S. 229 (1992), a taxpayer need prove only
that the claim underlying a damage award was based on “tort or
tort type rights” for the award to be excludable under pre-1996
sec. 104(a)(2), was expressly rejected by the Supreme Court in
Commissioner v. Schleier, 515 U.S. 323, 336 (1995):
Second, and more importantly, the holding of Burke is
narrower than * * * [the taxpayer] suggests. In Burke,
following the framework established in the Internal
Revenue Service regulations, we noted that § 104(a)(2)
requires a determination whether the underlying action
is “based upon tort or tort type rights.” * * * In so
doing, however, we did not hold that the inquiry into
“tort or tort type rights” constituted the beginning
and end of the analysis. In particular, though Burke
relied on Title VII’s failure to qualify as an action
based upon tort type rights, we did not intend to
eliminate the basic requirement found in both the
statute and the regulation that only amounts received
“on account of personal injuries or sickness” come
within § 104(a)(2)’s exclusion. Thus, though
satisfaction of Burke’s “tort or tort type” inquiry is
a necessary condition for excludability under §
104(a)(2), it is not a sufficient condition. [Fn. ref.
omitted.]
Thus, contrary to petitioners’ argument, both elements of the
Schleier test must be satisfied in order for the sec. 104(a)(2)
exclusion to apply. Commissioner v. Schleier, supra at 337;
United States v. Burke, supra at 233.
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only proximately caused by tortious conduct; it must also be
directly causally related to personal injuries. Commissioner v.
Schleier, supra at 329-330; see also O’Gilvie v. United States,
519 U.S. 79 (1996). In other words, the mere fact that a
taxpayer suffers a “personal” injury from a defendant’s conduct
is insufficient to satisfy the “on account of personal injuries
or sickness” test; only recovery that is “attributable to” such
personal injury is excludable from gross income. Commissioner v.
Schleier, supra at 330-331. As interpreted by the Supreme Court,
the phrase “on account of” imposes a “stronger causal
connection,” thereby making section 104(a)(2) “applicable only to
those personal injury lawsuit damages that were awarded by reason
of, or because of, the personal injuries.” O’Gilvie v. United
States, supra at 83.
In the instant case, Mrs. Campbell’s only claim against OTS
was that OTS did not follow the RIF regulations in effecting her
reduction in grade (i.e., her demotion). On appeal to the MSPB,
her requested relief from OTS’s violation of the RIF regulations
was for OTS’s action reclassifying her position to be vacated and
for an award of compensatory damages including the lost wages and
benefits she would have been entitled to had she retained her
original position. The MSPB agreed with Mrs. Campbell and
ordered OTS to cancel Mrs. Campbell’s demotion and restore her to
her former position effective December 12, 1990, and to issue a
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check to Mrs. Campbell for the appropriate amount of backpay and
interest on the backpay. There is no evidence in the record that
Mrs. Campbell alleged to OTS or to the MSPB that she suffered any
personal injuries or sickness as a result of OTS’s violation of
the RIF regulations in effecting her demotion, nor is there any
evidence that the MSPB awarded her damages attributable to such
personal injuries or sickness. Accordingly, we cannot say that
the MSPB awarded Mrs. Campbell backpay and interest thereon “by
reason of, or because of, * * * personal injuries.” O’Gilvie v.
United States, supra at 83.
We recognize that, in some cases, damages measured by lost
wages can satisfy the second prong of the test in Commissioner v.
Schleier, supra, because they are awarded “on account of”
personal injuries or sickness. For example, if a taxpayer was
out of work for a time as a direct result of injuries, the
economic damages received to replace the wages lost during that
time would be excludable. Commissioner v. Schleier, supra at
329-331. This, however, is not the case for Mrs. Campbell. The
MSPB did not compensate Mrs. Campbell for wages she lost as a
result of missing work due to any personal injuries or sickness.
Rather, the award of backpay and interest on backpay ordered by
the MSPB replaced the pay and benefits Mrs. Campbell lost due to
her demotion without the benefit of the RIF regulations. As
such, the award of backpay and interest on backpay was not
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received by Mrs. Campbell on account of personal injuries or
sickness within the meaning of section 104(a)(2).
Conclusion
We hold that the $1,446 payment made by the FDIC to Mrs.
Campbell pursuant to the Order is not excludable under section
104(a)(2) and, thus, respondent’s determination is sustained. In
so holding, we have considered all of petitioners’ arguments and,
to the extent not discussed above, conclude that they are without
merit or are irrelevant.
Decision will be entered
for respondent.