T.C. Memo. 2007-286
UNITED STATES TAX COURT
CECIL R. AND CAROL L. HAWKINS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22833-05. Filed September 20, 2007.
Cecil R. and Carol L. Hawkins, pro sese.
Michael A. Skeen, for respondent.
MEMORANDUM OPINION
LARO, Judge: This case was submitted to the Court fully
stipulated pursuant to Rule 122.1 Petitioners petitioned the
Court to redetermine respondent’s determination of a $7,153
1
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise noted, section references are to the
applicable versions of the Internal Revenue Code.
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deficiency in their 2003 Federal income tax and a $1,415
accuracy-related penalty under section 6662(a). We decide
whether $25,000 received by Carol Hawkins (petitioner) in
settlement of her lawsuit (lawsuit) related to the termination of
her employment is excluded from her gross income under section
104(a)(2). We hold it is not.
Background
All facts were stipulated or contained in the exhibits
submitted with the parties’ stipulation of facts. Those
stipulated facts and exhibits are incorporated herein by this
reference. Petitioner and her spouse, Cecil Hawkins, filed a
joint 2003 Federal income tax return. They resided in San
Leandro, California, when their petition was filed commencing
this proceeding.
Petitioner was employed as an executive assistant by Alameda
County Fair Association (Alameda) from 1999 to 2002. Shortly
after she was hired, she was told that she would receive a
one-hour paid lunch. In May 2002, she was told that she was not
entitled to a one-hour paid lunch and that she had to repay the
wages she received from May 15, 2001, to May 15, 2002,
attributable to her lunch hours. Petitioner refused to repay
those wages, and she was placed on administrative leave. She was
later told that she had resigned her position even though she was
willing to continue working at Alameda.
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Petitioner commenced the lawsuit in 2003 against Alameda and
its chief executive officer (collectively, Alameda). She alleged
in the lawsuit, filed and prosecuted by her pro se in the United
States District Court for the Northern District of California,
that Alameda had caused her damages stemming from race
discrimination, breach of contract, breach of the covenant of
good faith and fair dealing, and harassment. She claimed in the
lawsuit the following damages:
Backpay $24,000
Future pay 100,000
Emotional distress (including
mental and physical pain
and suffering) 75,000
Health benefits 800
Punitive and exemplary damages 300,000
1
Total 490,800
1
The claimed damages actually total $499,800
rather than $490,800 as reported by petitioner.
In November 2003, petitioner and Alameda agreed to settle
the lawsuit. Under the settlement agreement, petitioner released
all claims against Alameda in exchange for a single payment of
$25,000. The settlement agreement stated that petitioner had
filed the lawsuit against Alameda seeking “wages, penalties,
other damages, and attorneys’ fees”, that Alameda would issue
petitioner a Form 1099 in connection with its payment of the
$25,000, and that petitioner had to give Alameda a completed
Form W-9, Request for Taxpayer Identification Number and
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Certification, as a condition precedent to Alameda’s paying the
$25,000 to petitioner.
Petitioner received the $25,000 in 2003, and Alameda issued
to petitioner a 2003 Form 1099-MISC, Miscellaneous Income,
reporting its payment of that amount to her as nonemployee
compensation. Petitioner did not report the $25,000 on her 2003
Federal income tax return.
Discussion
Respondent determined that the $25,000 is included in
petitioner’s 2003 gross income. Petitioners argue alternatively
that the $25,000 is not “income” in the context of the 16th
Amendment and that the $25,000, if income, is excluded from their
gross income under section 104(a)(2) as damages received for
emotional distress inclusive of mental pain and anguish. In
their posttrial brief, petitioners point the Court to Murphy v.
IRS, 460 F.3d 79 (D.C. Cir. 2006), and assert that the opinion
there controls this case. In Murphy, a panel of the Court of
Appeals for the D.C. Circuit held that section 104(a)(2) violated
the 16th Amendment insofar as it permitted the taxation of an
award of damages for mental distress and loss of reputation. The
opinion reasoned that damages awarded to the taxpayer for mental
pain and anguish were not received in lieu of something normally
taxed as income, nor were they income within the meaning of the
16th Amendment.
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Without regard to which party bears the burden of proof, we
find and hold that the $25,000 is income to petitioner and that
none of the $25,000 constitutes damages received “on account of
personal physical injuries or physical sickness” within the
meaning of section 104(a)(2).2 We reject at the outset
petitioners’ reliance on Murphy v. IRS, supra. After the filing
of petitioners’ posttrial brief, the Court of Appeals for the
D.C. Circuit vacated its judgment resulting from that opinion and
reheard arguments on the case. Later, in Murphy v. IRS, 493 F.3d
170 (D.C. Cir. 2007), the Court of Appeals for the D.C. Circuit
held that the damages received by the taxpayer were income
included in the taxpayer’s gross income and were outside the
exclusion in section 104(a)(2). We agree without further comment
that the $25,000 is income to petitioner and limit our subsequent
inquiry to whether the $25,000 is excluded from their gross
income under section 104(a)(2).
Section 104(a)(2) is construed narrowly. See, e.g.,
O’Gilvie v. United States, 519 U.S. 79 (1996); Commissioner v.
Schleier, 515 U.S. 323, 328 (1995). Under section 104(a)(2),
settlement proceeds are excludable from gross income to the
extent: (1) The underlying cause of action is based upon tort or
2
We apply sec. 104(a)(2) as amended in 1996 by the Small
Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1605,
110 Stat. 1838, effective generally for amounts received after
Aug. 20, 1996. That amendment, in relevant part, added the
modifier “physical” after “personal” and before “injuries”.
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tort-type rights, and (2) the proceeds were received on account
of “personal physical injuries” or “physical sickness”. See
Commissioner v. Schleier, supra at 333-334 (analyzing section
104(a)(2) before its amendment in 1996); Robinson v.
Commissioner, 102 T.C. 116 (1994), affd. in part and revd. in
part on an issue not relevant herein 70 F.3d 34 (5th Cir. 1995);
Shaltz v. Commissioner, T.C. Memo. 2003-173. We focus on the
second requirement and ask ourselves whether petitioner’s $25,000
settlement was received on account of “personal physical
injuries” or “physical sickness”. In this context, the terms
“physical injury” and “physical sickness” do not include
emotional distress, except to the extent of damages not in excess
of the amount paid for medical care described in section
213(d)(1)(A) and (B) attributable to emotional distress. See
sec. 104(a) (flush language).
We determine the reason for the settlement payment by
ascertaining the intent of the payor in making the payment. See
Robinson v. Commissioner, supra at 127. We make that
determination by analyzing all relevant facts and circumstances.
See id.; see also Shaltz v. Commissioner, supra. We conclude
from our analysis that petitioner never sought in the lawsuit a
recovery of damages for “personal physical injuries” or “physical
sickness” and, most importantly, that Alameda did not pay the
$25,000 to petitioner with any intent to settle a claim of hers
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for “personal physical injuries” or “physical sickness”. In the
latter regard, we find from the record that the settlement
agreement memorialized Alameda’s understanding that petitioner
had filed the lawsuit against Alameda seeking “wages, penalties,
other damages, and attorneys’ fees”, that Alameda would issue
petitioner a Form 1099 to reflect its payment to her of the
$25,000 as a payment of income, and that Alameda required
petitioner to give to it a completed Form W-9 as a condition
precedent to Alameda’s paying the $25,000 to petitioner. We also
find with respect to the $25,000 payment that Alameda actually
issued to petitioner a 2003 Form 1099-MISC reporting that it had
paid her the $25,000 as nonemployee compensation.
We hold that the $25,000 was not paid to petitioner for
personal physical injuries or physical sickness within the
meaning of section 104(a)(2). While petitioners emphasize the
fact that petitioner claimed damages for emotional distress, and
we believe that part of the $25,000 may have been paid to satisfy
and extinguish that claim, our conclusion does not change.
Damages for emotional distress no longer qualify for exclusion
under section 104(a)(2), except to the extent that they do not
exceed the amount paid for medical care related to the emotional
distress. Sec. 104(a)(2) and flush language; Kidd v.
Commissioner, T.C. Memo. 2004-135; see H. Conf. Rept. 104-737, at
301 n.56 (1996), 1996-3 C.B. 741, 1041 n.56 (emotional distress,
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including symptoms such as insomnia, headaches, and stomach
disorders, is not considered a physical injury or physical
sickness, except that an exclusion may be allowed to the amount
paid for medical care attributable to the emotional distress).
See generally Black's Law Dictionary 542 (7th ed. 1999)
(“emotional distress” denotes “A highly unpleasant mental
reaction (such as anguish, grief, fright, humiliation, or fury)
that results from another person’s conduct; emotional pain and
suffering.”). Petitioners have not asserted that they paid for
any medical care attributable to emotional distress, so as to
come within the just-referenced exception, and the record does
not establish that any such payments were in fact made.
All arguments made by petitioners for a holding contrary to
that expressed herein have been considered, and we reject those
arguments not discussed herein as irrelevant or without merit.
Decision will be entered
for respondent.