High v. Comm'r

T.C. Summary Opinion 2011-36

UNITED STATES TAX COURT

ROBERT HAROLD HIGH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 30525-08S. Filed March 28, 2011.

Robert Harold High, pro se.

Scott A. Hovey, for respondent.

GUSTAFSON, Judge: This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect when the petition was filed. Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

1
Unless otherwise noted, citations herein of sections refer
to the Internal Revenue Code (26 U.S.C.), and citations of Rules
refer to the Tax Court Rules of Practice and Procedure.
 -2-

and this opinion shall not be treated as precedent for any other

case.

By a statutory notice of deficiency dated September 8, 2008,

the Internal Revenue Service (IRS) determined a deficiency of

$18,121 in petitioner Robert Harold High’s 2006 Federal income

tax, as well as an addition to tax of $1,620 pursuant to section

6651(a)(1) and an accuracy-related penalty of $3,624 pursuant to

section 6662(a). Mr. High initiated this case pursuant to

section 6213(a), asking this Court to redetermine the deficiency.

After concessions,2 the issues for decision are (i) whether

either of the payments of $11,675 and $54,000 that Mr. High

received from Worldwide Flight Services, Inc. (Worldwide), in

2006 is excludable from his gross income under section 104(a)(2);

and (ii) whether Mr. High is liable for (a) an addition to tax

under section 6651(a)(1) for failing to timely file his 2006

return, and (b) an accuracy-related penalty under

section 6662(a).

For the reasons set forth below, we hold (i) that no portion

of the $65,675 Mr. High received from Worldwide in 2006 is

2
Mr. High does not dispute the following adjustments to
income in the notice of deficiency: interest income of $87 from
Washington Mutual Bank; interest income of $76 from Nevada State
Bank; and interest income of $49 from Bank of America. The
notice of deficiency also determined that Mr. High was liable for
an additional tax of $39 for early withdrawal under section
72(t). Mr. High did not assign error to this adjustment in his
petition and has not raised it otherwise. Pursuant to Rule
34(b)(4), we find that Mr. High has conceded this adjustment as
well.
 -3-

properly excludable from his gross income under section

104(a)(2); and (ii) Mr. High is liable for the addition to tax

and the accuracy-related penalty.

Background

This case was submitted fully stipulated pursuant to

Rule 122. The stipulation of facts filed May 5, 2010, and the

attached exhibits are incorporated herein by this reference. At

the time he filed the petition herein, Mr. High resided in

Thailand.

Mr. High’s discrimination settlement

Mr. High worked for Worldwide Flight Services, Inc.

(Worldwide),3 before 1989. Sometime in 1989 he was discharged

from Worldwide. In early 1990 Mr. High filed a complaint with

the Division of Human Rights, State of New York: Executive

Department. In the complaint Mr. High charged Worldwide with

unlawful discriminatory practices relating to an employment

violation of the Human Rights Law of the State of New York.4 The

Division of Human Rights found that Mr. High was entitled to

damages, and in October 2004 the Appellate Division affirmed that

3
Before 1999 Mr. High’s employer was known as AMR Services
Corp. In 1999 Castle Harlan purchased AMR and renamed it
Worldwide. At the time of the settlement at issue here, the
entity was named Worldwide, so for the sake of simplicity we use
that name throughout this opinion.
4
The exact nature of the unlawful discriminatory practices
alleged is unclear as the complaint is not part of the record in
this case.
 -4-

finding with modifications. In December 2004 the Division of

Human Rights directed Mr. High and Worldwide to undertake

proceedings to resolve the amount of those damages. (Neither the

complaint, nor the decision of the Division of Human Rights, nor

the Appellate Division’s affirmance is in our record.)

In early July 2006, Mr. High and Worldwide entered into a

settlement agreement (the Settlement) resolving all disputes

between the parties. On July 27, 2006, the Settlement was

adopted by the Division of Human Rights. The Settlement provided

that Mr. High would receive total compensation of $110,000

allocated between (i) $56,000 in backpay that would be reported

on a Form W-2, Wage and Tax Statement, and (ii) $54,000 as

interest on said back pay that would be reported on a Form 1099-

MISC, Miscellaneous Income.

Worldwide’s payments to Mr. High

On June 22, 2006--i.e., before the Settlement was finalized

in July 2006--Worldwide issued to Mr. High a check for $11,675,

which Worldwide recorded as “interest on legal settlement” in its

accounting system. Shortly after the Settlement was finalized,

on or about July 17, 2006, Worldwide issued a check to Mr. High

for $54,000, which Worldwide recorded as “interest on legal

settlement” in its accounting system. Sometime during 2006

Worldwide also issued a separate check to Mr. High for $56,000,

in satisfaction of its obligation under the Settlement for back
 -5-

pay. From that $56,000 Worldwide withheld $14,000 in Federal

income tax, $3,472 in Social Security tax, and $812 in Medicare

tax.

Worldwide’s and Mr. High’s tax reporting

In early 2007, in anticipation of the tax filing season for

tax year 2006, Worldwide issued two separate information returns

to Mr. High--a Form 1099-MISC reporting $65,675 in miscellaneous

income; and a Form W-2 reporting $56,000 in wages, $14,000 in

Federal withholdings, $3,472 in Social Security withholdings, and

$812 in Medicare withholdings.

Mr. High filed his Form 1040, U.S. Individual Income Tax

Return, for tax year 2006 in 2007. The precise date of the

filing of that return is in dispute, but on the record before us

we find that the IRS received it on June 5, 2007. On his return

Mr. High did include in his gross income the $56,000 of back pay

that he had received from Worldwide and that Worldwide had

reported on Form W-2. The taxability of that amount is not in

dispute. Mr. High did not report on his return, as gross income

or otherwise, the two other payments--$11,675 and $54,000

denominated as interest--that he had received from Worldwide in

2006 and that Worldwide had reported on Form 1099-MISC. On line

21 of his 2006 return Mr. High reported $21,215 in other income

from sources other than Worldwide.5 The return reflected a

5
This other income presumably did not include the amounts
(continued...)
 -6-

refund due to Mr. High in the amount of $1,929. Using the

figures reported on Mr. High’s return, on or about June 25, 2007,

the IRS issued a refund to Mr. High in the requested amount of

$1,929.

The statutory notice of deficiency and the commencement
of this suit

However, the IRS thereafter became aware of Worldwide’s

Form 1099-MISC showing additional income to Mr. High that he had

not reported. On September 8, 2008, the IRS issued the statutory

notice of deficiency to Mr. High for tax year 2006. In that

notice the IRS determined a deficiency of $18,121, a failure-to-

file penalty of $1,620 pursuant to section 6651(a)(1), and an

accuracy-related penalty of $3,624 pursuant to section 6662(a).

The primary adjustment was attributable to Mr. High’s failure to

include, in his 2006 gross income, the payments of $11,675 and

$54,000 that he had received from Worldwide in 2006.

Mr. High timely petitioned this Court under section 6213.

In his amendment to petition, filed July 1, 2009, Mr. High

stated:

I FILED MY 2006 - TAX RETURN WITH PRO-TAX SERVICES - IN
LAS VEGAS ON TIME. THE IRS HAS ALL MY 2006 W2 FORMS
FROM ALL MY INCOME WHEN THEY (IRS) SENT ME A TAX REFUND
FOR THAT YR. 2006 THEY HAD THE 1099 MISC. FORM, FOR THE
65,675 DOLLARS AT THE TIME THEY MAILED MY REFUND CHECK.
IF MY FILING WAS INCORRECT - THE IRS HAD THE
INFORMATION TO CORRECT IT. I WAS FIRED FROM WORLD WIDE
SERVICES IN 1988 - THE CASE WAS SETTLED IN 2006 - THE

5
(...continued)
Mr. High conceded in this case. See supra note 2.
 -7-

$65,675 REPRESENTED MY MEDICAL EXPENSES FOR THE 18 YRS.
PLUS PAIN AND SUFFERING. I PAID TAXES ON ALL THE BACK
WAGES THAT WAS AWARDED TO ME. I AM NOW 71 YRS. OLD AND
LIVE IN THAILAND. MY ONLY SOURCE OF INCOME IS SOCIAL
SECURITY. THAILAND IS THE ONLY PLACE I CAN AFFORD TO
LIVE ON MY INCOME.

On the basis of Mr. High’s submissions, we understand his

arguments to be: (i) He timely filed his income tax return for

2006; (ii) the IRS should be estopped from determining any

deficiency against him since it had all the information relating

to the payments from Worldwide at the time it issued his refund;

(iii) the $11,675 and $54,000 payments from Worldwide were

properly excluded from his income because they represented

payment for medical expenses and pain and suffering; and (iv) he

has limited resources from which to pay any tax liability. We

will address each of Mr. High’s contentions below.

On April 12, 2010, respondent moved to submit this case for

decision under Rule 122, indicating that Mr. High did not object

to the granting of respondent’s motion. On June 9, 2010,

respondent’s motion was granted, and this case is now before the

Court for decision without trial.

Discussion

As a general rule, the Commissioner’s determinations are

presumed correct, and the taxpayer has the burden of establishing

that the determinations in the notice of deficiency are

erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Mr. High has not contended that the burden of proof has
 -8-

shifted pursuant to section 7491(a), and the record shows no

basis for such a contention.

I. Taxability of settlement award

There is no dispute between the parties that the $56,000

that Mr. High received from Worldwide in 2006 constituted gross

income. Instead, the controversy in this case centers on the

taxability of the two payments of $11,675 and $54,000–-totaling

$65,675--that Mr. High received from Worldwide in 2006. Mr. High

maintains that no portion of the $65,675 should constitute gross

income to him because it represented payment from Worldwide for

his medical expenses and pain and suffering. We construe

Mr. High’s position to be that the $65,675 is excludable from his

gross income pursuant to section 104(a)(2).

A. General legal principles

Section 61(a) provides the following broad definition of the

term “gross income”: “Except as otherwise provided in this

subtitle, gross income means all income from whatever source

derived”. Section 61(a) is thus broad in its scope, and

exclusions from gross income must be narrowly construed.

Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
 -9-

Section 104(a) provides that gross income does not include:

(2) the amount of any damages[6] (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. The preceding sentence shall not apply to an
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.

The legislative history shows that “[i]t is intended that 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. Therefore, to be excludable from gross

income under section 104(a)(2), a settlement award must be paid

to a taxpayer on account of physical injury or physical sickness,

which does not include emotional distress or symptoms thereof.

Where damages are received pursuant to a settlement

agreement like Mr. High’s, the nature of the claim that was the

actual basis for settlement controls whether those damages are

excludable under section 104(a)(2). United States v. Burke, 504

6
The term “damages received (whether by suit or agreement)”
means 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. 26 C.F.R. sec. 1.104-1(c), Income
Tax Regs.
 -10-

U.S. 229, 237 (1992). Whether the settlement payment is

excludable from gross income under section 104(a)(2) depends on

the nature and the character of the claims asserted in the

lawsuit. See Bent v. Commissioner, 87 T.C. 236, 244 (1986),

affd. 835 F.2d 67 (3d Cir. 1987). The determination of the

underlying nature of the claim is factual. Robinson v.

Commissioner, 102 T.C. 116, 126 (1994), affd. in part, revd. in

part and remanded on another issue 70 F.3d 34 (5th Cir. 1995).

Where there is a settlement agreement, the determination of the

nature of the claim is usually made by reference to the

agreement. Id. If the settlement agreement lacks express

language stating the claims that payment was to settle, the

intent of the payor (here, Worldwide) is critical to that

determination. Knuckles v. Commissioner, 349 F.2d 610, 613 (10th

Cir. 1965), affg. T.C. Memo. 1964-33.

B. The nature of Mr. High’s claim against Worldwide

The parties have stipulated that Mr. High filed a complaint

against his former employer alleging “unlawful discriminatory

practices relating to an employment violation of the Human Rights

Law of the State of New York”. Beyond that, we do not know the

exact nature of the underlying claim that Mr. High made before

the Division of Human Rights because the complaint is not part of

the record in this case. Likewise, the decision of the Division

of Human Rights is not before us, and Mr. High gave no testimony
 -11-

elaborating on the situation. We therefore do not know the

particular wrongs that he alleged his employer committed nor the

particular kinds of damages that he alleged he suffered.

As a result, all we can consider in determining whether the

payments from Worldwide are excludable from income under section

104(a)(2) is the settlement agreement reached in July 2006

between Worldwide and Mr. High. Under that Settlement, Mr. High

would be paid $110,000 by Worldwide “in full and complete

settlement of Complainant’s remaining claims in this proceeding”.

The Settlement then allocated the payment of $110,000 between (i)

$56,000 for “backpay”, and (ii) $54,000 for “interest on

backpay.” The record includes nothing to contradict that

explicit characterization of the payments, and we find that

Mr. High’s claim had the same character. That is, he claimed

back pay and interest.

C. Analysis of the two payments

This case does not present the common scenario in which a

single lump sum is agreed on as the settlement amount and the

settlement agreement is silent as to the allocation of that sum

among various kinds of damages. Cf. Longoria v. Commissioner,

T.C. Memo. 2009-162. Likewise, we are not faced with the task of

determining what portion of a settlement, if any, should be

attributable to interest. Instead, the Settlement reached in

Mr. High’s case was very specific: $56,000 was explicitly
 -12-

characterized as back pay and $54,000 was explicitly

characterized as interest on that back pay. Mr. High maintains

that the two payments of $11,675 and $54,000--totaling $65,675

--received from Worldwide were intended to compensate him for his

medical expenses and pain and suffering. We must reject

Mr. High’s position.

1. Worldwide’s $54,000 payment

In compliance with the Settlement, on or about July 17,

2006, Worldwide issued a check to Mr. High for $54,000.

Consistent with the terms of the Settlement, Worldwide recorded

this payment as “interest on legal settlement” in its accounting

system. The only evidence that Mr. High offers that the $54,000

should be attributable to anything other than interest is his own

uncorroborated assertion in his petition that it was attributable

to “18 years of medical expenses, plus pain and suffering”.

Because Mr. High did not show he made any claim for pain and

suffering or medical expenses, and because both the Settlement

and Worldwide (as the payor) characterize this $54,000 payment as

“interest”, we find that the $54,000 Mr. High received from

Worldwide was not intended to compensate for any medical expenses

or pain and suffering, but instead constituted interest on the

back pay that was awarded to Mr. High.

Gross income includes interest. Sec. 61(a)(4).

Furthermore, interest on any award is taxable whether the
 -13-

underlying award is taxable or nontaxable. See Kovacs v.

Commissioner, 100 T.C. 124, 128-130 (1993), affd. without

published opinion 25 F.3d 1048 (6th Cir. 1994). As a result, we

find that the $54,000 Mr. High received from Worldwide in 2006

was not properly excluded from his gross income under section

104(a)(2).

2. Worldwide’s $11,675 payment

In addition to the $54,000 Mr. High received from Worldwide

as interest on his back pay award, which the Settlement expressly

called for, Worldwide also issued Mr. High a check for $11,675,

on or about June 22, 2006. This $11,675 payment was prior to the

Settlement and is not referenced therein. On these facts, we

cannot conclude that this $11,675 was attributable to the

Settlement of the discrimination complaint on which Mr. High

bases his contention under section 104(a)(2). Worldwide did

record this payment as “interest on legal settlement” in its

accounting system, but there is no evidence that it related to

the Settlement as to which the parties have stipulated. Assuming

arguendo that this $11,675 payment was part of the discrimination

Settlement finalized in July 2006, Mr. High has offered no

evidence to refute Worldwide’s characterization of this payment

as interest in its accounting system. As a result, we find that,

in any event, this $11,675 represents interest income to Mr. High
 -14-

and should not have been excluded from his income under section

104(a)(2).

On the basis of the foregoing, we hold that no portion of

the $65,675 Mr. High received from Worldwide in 2006 is

excludable from gross income under section 104(a)(2).

II. Addition to tax and penalty

A. Failure-to-file addition to tax

Section 6651(a)(1) authorizes the imposition of an addition

to tax for failure to file a timely return unless the taxpayer

proves that such failure is due to reasonable cause and is not

due to willful neglect. See also United States v. Boyle, 469

U.S. 241, 245 (1985); Harris v. Commissioner, T.C. Memo. 1998-

332. Mr. High’s return for tax year 2006 was due on April 17,

2007.7 Respondent’s records, which were submitted as part of the

stipulation of facts in this case, indicate that the IRS received

Mr. High’s return for 2006 on “20070605” (i.e., June 5, 2007).8

This evidence is sufficient to satisfy respondent’s burden of

production under section 7491(c), and we so find. See Cobaugh v.

Commissioner, T.C. Memo. 2008-199.

7
Taxpayers had an additional two days to file their income
tax returns for tax year 2006 because April 15, 2007, fell on a
Sunday, and the following day, Monday, April 16, 2007, was
Emancipation Day, a legal holiday in the District of Columbia.
8
The stipulation of facts states that respondent’s records
indicate that the return was filed on June 6, 2005. This appears
to be a typographical error. We observe that respondent’s
records indicate that Mr. High’s return for tax year 2006 was
filed on June 5, 2007.
 -15-

With regard to the actions of public officials and to

official records, we recognize a presumption of their

correctness. Riggs Natl. Corp. & Subs. v. Commissioner, 295 F.3d

16, 20 (D.C. Cir. 2002), revg. T.C. Memo. 2001-12; see also

Webster v. Estelle, 505 F.2d 926, 929–930 (5th Cir. 1974)

(“Official records are entitled to a presumption of regularity”).

Such a presumption is not absolute but rather is rebuttable

“through clear or specific evidence.” Riggs Natl. Corp. & Subs.

v. Commissioner, 295 F.3d at 21. As a result, absent some

showing of irregularity in the IRS’s records, which Mr. High has

not alleged or shown, the records serve as presumptive evidence

that Mr. High’s return for tax year 2006 was untimely filed on

June 5, 2007.

In his amendment to petition, Mr. High asserts that “I FILED

MY 2006 - TAX RETURN WITH PRO-TAX SERVICES - IN LAS VEGAS ON

TIME.”9 Mr. High did not provide any evidence, other than this

uncorroborated statement, regarding the date his 2006 return was

filed; rather, the case was submitted on a stipulated record

under Rule 122. Mr. High declined the chance to offer any

argument or explanation to refute the IRS’s records when he

failed to file a brief in this case.

9
We cannot tell whether the petition asserts that the return
was timely filed with the IRS or whether it simply asserts that
Mr. High timely gave the return to a preparer and assumes that
the preparer filed it timely with the IRS.
 -16-

Accordingly, we find that Mr. High did not timely file his

tax return for 2006, and we hold that Mr. High is liable for the

addition to tax under section 6651(a)(1) for that year.

B. Accuracy-related penalty

Section 6662 imposes an “accuracy-related penalty” of

20 percent of the portion of the underpayment of tax attributable

to any substantial understatement of income tax. See sec.

6662(a), (b)(2). Pursuant to section 7491(c), the Commissioner

bears the burden of production and must produce sufficient

evidence showing the imposition of the penalty is appropriate in

a given case. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

An understatement of income tax is substantial if it exceeds the

greater of $5,000 or 10 percent of the tax required to be shown

on the return. Sec. 6662(d)(1). Respondent meets his burden,

because the deficiency attributable to the tax is $18,121 and the

corrected tax liability is $30,222; thus the understatement is

both greater than $5,000 and greater than 10 percent of $30,222.

Once the Commissioner meets this burden, the taxpayer must come

forward with persuasive evidence that the Commissioner’s

determination is incorrect. Rule 142(a); Higbee v. Commissioner,

116 T.C. at 447.

A taxpayer who is otherwise liable for the accuracy-related

penalty may avoid the liability if he successfully invokes one of

three other provisions: Section 6662(d)(2)(B) provides that an
 -17-

understatement may be reduced, first, where the taxpayer had

substantial authority for his treatment of any item giving rise

to the understatement or, second, where the relevant facts

affecting the item’s treatment are adequately disclosed and the

taxpayer had a reasonable basis for his treatment of that item.

Third, section 6664(c)(1) provides that, if the taxpayer shows

that there was reasonable cause for a portion of an underpayment

and that he acted in good faith with respect to such portion, no

accuracy-related penalty shall be imposed with respect to that

portion.

Mr. High did not invoke any of these provisions in anything

he submitted in this case. Perhaps the closest he came to such

an argument is the assertion in his amendment to petition that

the IRS “HAD THE 1099 MISC. FORM, FOR THE 65,675 DOLLARS AT THE

TIME THEY MAILED MY REFUND CHECK.” If this is intended as an

assertion that his receipt of the $65,675 was “adequately

disclosed” for purposes of section 6662(d)(2)(B)(ii)(I), then the

argument would fail: First, the statute requires both adequate

disclosure (in subclause (I)) and a “reasonable basis” (in

subclause (II)), the latter of which is lacking here. Second,

the employer’s submission of Form 1099-MISC hardly constitutes

the taxpayer’s “disclos[ure] in the return” (emphasis added), as

subclause (I) requires. Mr. High did not rebut respondent’s

showing that he is liable for the accuracy-related penalty. As a
 -18-

result, we hold that Mr. High is liable for an accuracy-related

penalty under section 6662 for tax year 2006.

III. Additional contentions

Mr. High’s two additional contentions can be briefly

addressed.

A. Estoppel

Mr. High apparently argues that respondent should be

precluded, or estopped, from determining any deficiency against

him for tax year 2006 because the IRS issued Mr. High a refund

for that year at a time when it had all of the information on

which it now bases its proposed adjustments. If Mr. High had the

impression, when he received a refund for 2006, that his business

with the IRS for that year was necessarily concluded, then his

belief was mistaken. The IRS is not barred from determining a

deficiency in Mr. High’s income tax simply because he was

previously issued a refund. See Milleg v. Commissioner, 19 T.C.

395, 398 (1952) (“The allowance of the refund was not a final

determination and the respondent determined the deficiency within

the time allowed under the statutory provisions. In the absence

of a closing agreement, valid compromise, final adjudication or

the running of the statute of limitations, the respondent may

make new and different assessment[s] against the same taxpayer,

for the same year, and in respect of the same type of tax.”). As

a result, the IRS was not precluded from determining a deficiency
 -19-

against Mr. High for tax year 2006 simply because it had

previously issued a refund for that same year.

B. Inability to pay

Mr. High asserts that he has limited resources from which to

pay any tax liability. However, a taxpayers’s ability to pay the

tax he owes has no bearing on whether he owes the tax.

Mr. High’s argument may go towards the collectibility of his tax

liability but not its existence. The Tax Court is a court of

limited jurisdiction. We may therefore exercise jurisdiction

only to the extent expressly provided by statute. Breman v.

Commissioner, 66 T.C. 61, 66 (1976). In a deficiency case like

this one, brought under section 6213(a), the Tax Court has

jurisdiction to determine a taxpayer’s proper amount of tax,

additions to tax, and penalties, but it does not have

jurisdiction over collection issues. Cf. sec. 6330(d). As a

result, we lack jurisdiction in the instant case to entertain

Mr. High’s concerns regarding his limited ability to pay any tax

he may owe.

To reflect the foregoing,

Decision will be entered

for respondent.