T.C. Memo. 2009-143
UNITED STATES TAX COURT
JON E. HELLESEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8606-05. Filed June 18, 2009.
Jon E. Hellesen, pro se.
Monica D. Gingras, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a $87,422 deficiency
in petitioner’s 1997 Federal income tax and a $21,855.50 addition
to tax under section 6651(a)(1).1 The deficiency arises from
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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$273,500 of unreported income from settlement proceeds, interest
received, and a State income tax refund. Petitioner conceded the
deficiency relating to the interest and the State income tax
refund.
The issues for decision are: (1) Whether petitioner may
exclude the settlement proceeds received from his gross income
pursuant to section 104(a)(2); and (2) whether petitioner is
liable for an addition to tax under section 6651(a)(1) for his
failure to timely file a return. We hold that the settlement
award is not excludable from gross income and petitioner is
liable for the failure to file addition to tax under section
6651(a)(1).
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. Petitioner resided in
California at the time of filing his petition with this Court.
Petitioner was employed as a claims litigation attorney by
State Farm Insurance Co. (State Farm) from April 1988 through
August 12, 1994. Petitioner’s wife, Beverly Harlan (Ms. Harlan),
was also employed as a claims litigation attorney by State Farm
from September 20, 1991, through February 13, 1995. Petitioner
and his wife jointly filed a lawsuit against State Farm based on
allegations related to their employment and discharge from State
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Farm. Petitioner and Ms. Harlan filed the lawsuit on August 8,
1995, and alleged the following seven causes of action:
(1) Sexual Harassment/Discrimination under Gov. Code §
12940, et seq. on Behalf of PLAINTIFF BEVERLY HARLAN v.
[sic] All DEFENDANTS,
(2) Tortious Discharge In Contravention of Public Policy
on Behalf of PLAINTIFF BEVERLY HARLAN vs. All DEFENDANTS,
(3) Negligence on behalf of PLAINTIFF BEVERLY HARLAN vs.
All DEFENDANTS,
(4) Negligent Misrepresentation on Behalf of PLAINTIFF
BEVERLY HARLAN vs. All DEFENDANTS,
(5) Fraud - Labor Code § 970-972 on Behalf of PLAINTIFF
BEVERLY HARLAN vs. All DEFENDANTS,
(6) Tortious Discharge in Contravention of Public Policy
Behalf of PLAINTIFF JON E. HELLESEN vs. All DEFENDANTS, and
(7) Negligence on Behalf of PLAINTIFF JON E. HELLESEN vs.
All DEFENDANTS.
In the complaint petitioner alleged that he had suffered extreme
and severe emotional distress including a lack of concentration,
loss of self-esteem, embarrassment, anxiety, humiliation and
stress. Petitioner requested general damages.
In the prayer for relief portion of the complaint petitioner
did not ask for damages resulting from physical injuries or
sickness from emotional distress. Petitioner asked for general
damages and further relief as the court deemed proper.
In connection with the lawsuit petitioner was deposed on
September 10, 11, and 12, 1996. In the deposition petitioner
stated that he was a victim of sexual harassment while working at
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State Farm and that it caused him to pace and to feel upset,
nervous, and stressed. Petitioner was able to work after his
termination from State Farm, but physical problems occurred as a
result of the termination. Petitioner experienced an escalation
in chest pains,2 an aching pain and loss of sensitivity on the
right side of his forehead, increased blood pressure, weight
loss, an upset stomach, irregular bowel movements, headaches, and
emotional instability.
Petitioner had a single appointment with each of two
physicians, Dr. Raszinski and Dr. Viltuznik, regarding his
physical ailments. Petitioner did not provide proof of costs
incurred for seeing the two physicians or paying for any sort of
medical care.
Petitioner saw Dr. Raszinski for his chest pains. The
doctor instructed petitioner to reduce his stress level and did
not diagnose a heart problem or prescribe him any medication.
Petitioner told Dr. Raszinski that difficulty at work had caused
his stress.
Petitioner saw Dr. Viltuznik for the pain and loss of
sensitivity over his right eye. Petitioner told Dr. Viltuznik
“it [area over right eye] seems to be a weakened area on my body
that as stress or upset, feelings build, it goes there.” On
deposition petitioner did not recall whether Dr. Viltuznik made a
2
Petitioner began feeling chest pains in 1993.
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diagnosis. Petitioner was referred to another doctor or medical
center for the condition but did not see anyone else about the
condition. At trial petitioner stated that Dr. Viltuznik had
diagnosed a condition in his head and stated that in 1994 a blood
vessel had burst in his head on the right side. Petitioner
reported this condition had not improved.
Petitioner has lost approximately 20 pounds since his
termination by State Farm. He began having an upset stomach
while working at State Farm. After his termination petitioner
became more emotional, and an upset stomach became a daily
problem.
Petitioner and his wife settled their lawsuit with State
Farm on August 19, 1997, for $550,000 less $3,000, the cost of
the arbitrator. In 1997 petitioner received a check for
$273,500, and in 1997 State Farm reported on a Form 1099-MISC,
Miscellaneous Income, that it paid petitioner $273,500. In the
Settlement Agreement and General Release (settlement agreement),
a paragraph titled “WITNESSETH” states as follows:
WHEREAS, CLAIMANTS claim they suffered personal
physical injuries and sickness, including, but not
limited to, medial [sic] injuries, costs and treatment,
resulting from being subjected to sexual harassment,
wrongful termination and retaliation caused by
Defendant, resulting in physical disabilities;
The “SETTLEMENT AND RELEASE” portion of the settlement agreement
states as follows:
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Said amount includes all obligations by Defendants to
CLAIMANTS including, without limitation, severance pay,
sick pay, and other wages or benefits, and general
damages for personal physical injuries and sickness,
including medical costs and treatment incurred therein,
as well as emotional injuries arising from CLAIMANTS’
alleged personal physical injuries and sickness from
alleged sexual harassment, wrongful termination and
retaliation and all other statutory, tort, contract or
other claims of any kind.
The settlement agreement does not allocate the portions of the
total amount being paid to settle claims related to sexual
harassment, tortious discharge, negligence, negligent
misrepresentation, and fraud. Further, there is no allocation of
the portions of the total amount being paid to petitioner and Ms.
Harlan; each received a check for half of the total settlement.
Petitioner filed his 1997 Federal income tax return on
August 11, 2000. Petitioner’s Federal tax return for 1997 was
due on August 15, 1998, because petitioner received an extension.
Petitioner did not report any of the settlement proceeds as
income on his 1997 return.
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 he satisfied the requirements of
section 7491(a) to shift the burden of proof to respondent.
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Accordingly, petitioner bears the burden of proof. See Rule
142(a).
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).
As relevant here, section 104 provides:
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[3]
shall not be treated as a physical injury or physical
sickness. The preceding sentence shall not apply to an
3
“[T]he 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.
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amount of damages not in excess of the amount paid for
medical care (described in subparagraph (A) or (B) of
section 213(d)(1)) attributable to emotional distress.[4]
“Damages received” means 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 and State Farm entered into a written settlement
agreement before trial. Petitioner was paid $273,500 to settle
all claims. Petitioner did not allege a cause of action in the
lawsuit for personal physical injuries or sickness; rather
petitioner claimed general damages resulting from negligence.
There is no allocation of amounts paid to settle physical
injuries and sickness. However, the amounts petitioner received
4
Sec. 104 was amended by the Small Business Job Protection
Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1838, to
provide, effective for amounts received after Aug. 20, 1996, that
the personal injury or sickness for which the damages are
received must be physical.
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settled all obligations by State Farm to pay petitioner for any
personal physical injuries and sickness arising from alleged
sexual harassment, wrongful termination, retaliation, and all
other statutory, tort, contract, or other claims of any kind.
If a settlement agreement lacks express language stating
what the settlement amount was paid to settle, we look to the
intent of the payor, on the basis of all the facts and
circumstances of the case, including the complaint filed and
details surrounding the litigation. United States v. Burke, 504
U.S. 229 (1992); Robinson v. Commissioner, 102 T.C. 116, 127
(1994), affd. in part and revd. in part on another issue 70 F.3d
34 (5th Cir. 1995); Knuckles v. Commissioner, T.C. Memo. 1964-33,
affd. 349 F.2d 610 (10th Cir. 1965). A key question to ask is
“‘In lieu of what were the damages awarded?’” Robinson v.
Commissioner, supra at 126 (quoting Raytheon Prod. Corp. v.
Commissioner, 144 F.2d 110, 113 (1st Cir. 1944), affg. 1 T.C. 952
(1943)).
We have previously addressed factual scenarios where a
settlement has been reached between the parties and there is no
express allocation of an amount of the settlement for physical
sickness and injuries. See Pettit v. Commissioner, T.C. Memo.
2008-87. In Pettit, a $240,000 settlement was apportioned as
follows: $44,250.12 attributed to lost wages; and $195,749.88
attributed to emotional distress, pain and suffering, and other
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nonwage damages. The settlement agreement made no allocation to
compensation for a physical injury or physical sickness, and the
Court made no apportionment of any of the settlement proceeds to
a physical injury or physical sickness. See also Seidel v.
Commissioner, T.C. Memo. 2007-45, affd. without published opinion
103 AFTR 2d 2009-1788, 2009-1 USTC par. 50,370 (9th Cir. 2009)
(written settlement agreement said: “‘[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’”, but did not
specifically allocate any portion of the settlement as paid for a
physical injury or physical sickness). Although petitioner has
stated his impression that in reaching a settlement, State Farm
was very concerned about his physical injuries, petitioner has
not presented any evidence in support of his impression, and we
are not required to accept petitioner’s self-serving testimony.
See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
Petitioner and his wife alleged seven causes of action in
their lawsuit. Petitioner did not allege physical injury or
sickness in his complaint, but the settlement agreement is broad
and encompasses all possible causes of action, including physical
injuries. However, there is no allocation of a specific amount
of the settlement as compensation for physical injuries or
physical sickness. Without such an allocation, no amount of the
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settlement may be excluded from income. Pettit v. Commissioner,
supra; Seidel v. Commissioner, supra. Petitioner must report the
entire settlement amount as income received in 1997.
II. Failure To File Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to
file a return when due “unless it is shown that such failure is
due to reasonable cause and not due to willful neglect”. The
addition equals 5 percent for each month that the return is late,
not to exceed 25 percent in total. The Commissioner has the
burden of production with respect to the liability of an
individual for an addition to tax under section 6651(a)(1). Sec.
7491(c). The burden of showing reasonable cause under section
6651(a) remains on the taxpayer. Higbee v. Commissioner, 116
T.C. 438, 446-448 (2001). To show reasonable cause, petitioner
must demonstrate that he exercised ordinary business care and
prudence but nevertheless was unable to file his 1997 Federal
income tax return by the due date. See United States v. Boyle,
469 U.S. 241, 246 (1985); sec. 301.6651-1(c), Proced. & Admin.
Regs. Willful neglect is defined as a “conscious, intentional
failure or reckless indifference.” United States v. Boyle, supra
at 245.
Petitioner has stipulated that he did not file his 1997
Federal income tax return until August 11, 2000. Petitioner’s
1997 Federal income tax return was due on August 15, 1998.
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Respondent accordingly met his burden of production with regard
to the section 6651(a)(1) addition to tax. See sec. 7491(c);
Higbee v. Commissioner, supra.
Petitioner has neither offered an explanation for his
failure to timely file his 1997 Federal income tax return nor
produced evidence to establish any reasonable cause for his
failure to timely file this return. We sustain respondent’s
determination of an addition to tax under section 6651(a)(1).
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we find them to be
without merit, irrelevant, or moot.
To reflect the foregoing,
Decision will be entered
for respondent.
y