T.C. Memo. 2011-295
UNITED STATES TAX COURT
SYED A. AND RAFIUNNISA R. AHMED, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5080-10. Filed December 22, 2011.
Syed A. and Rafiunnisa R. Ahmed, pro sese.
Tammra S. Mitchell, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined a deficiency of $22,185
in petitioner’s 2007 Federal income tax and an accuracy-related
penalty of $4,437 pursuant to section 6662(a).1 The issues we
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended and in effect for the
year at issue, and Rule references are to the Tax Court Rules of
Practice and Procedure.
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must decide are whether proceeds from the settlement of an
employment discrimination lawsuit are excludable from gross
income pursuant to section 104(a)(2) and whether petitioner is
liable for the accuracy-related penalty pursuant to section
6662(a).
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated.
The parties’ stipulations of facts are incorporated in this
opinion by reference and are found accordingly. At the time they
filed their petition, petitioners were residents of Georgia.
Syed A. Ahmed (petitioner) was born in India but immigrated
to the United States, and he became a U.S. citizen in 1999.
Petitioner is a practicing Muslim.
In 1990 Fulton County hired petitioner as a programmer in
its information technology department. In 1999 petitioner was
promoted to the position of systems analyst.
During his employment with Fulton County petitioner filed
several complaints with State and Federal agencies alleging
discrimination. On July 11, 2006, he filed a complaint in the
U.S. District Court for the Northern District of Georgia, seeking
damages and injunctive relief against Fulton County.
In that complaint, petitioner raised claims pursuant to 42
U.S.C. section 1983 that his constitutional rights had been
violated under the color of State law; that he had been
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discriminated against on the basis of his race, religion, and
national origin in violation of title VII of the Civil Rights Act
of 1964; that Fulton County had retaliated against him for filing
complaints alleging discrimination in violation of title VII of
the Civil Rights Act of 1964; that he had been terminated and
denied access to public buildings on the basis of his race in
violation of 42 U.S.C. section 1981; and that he had been
discriminated against in violation of the Age Discrimination in
Employment Act. In his complaint, he prayed for the following
relief: Backpay; back benefits; compensatory and punitive
damages from Fulton County; compensatory and punitive damages
from his former supervisor; liquidated damages; the recovery of
legal expenses; and the promotion he was denied.
In support of his claims, he alleged numerous specific facts
regarding discriminatory treatment. He alleged that, following
September 11, 2001, his coworkers and supervisors became hostile
towards him because of his Muslim faith. He alleged that he was
terminated from his job in retaliation for filing a complaint
about his treatment with the Georgia Office of Equal Employment
Opportunity. He alleged that his supervisors continued to harass
him even after he was terminated, arranging for Fulton County to
post flyers in all Fulton County buildings that prohibited him
from entering public buildings in Fulton County. Petitioner had
a heart attack during August 2004, shortly after being terminated
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by Fulton County, and he alleged that the harassment he suffered
while employed by Fulton County contributed to his heart attack.
Although petitioner was reinstated with backpay by the
Fulton County Personnel Board, he alleged that the harassment
continued and even grew worse after he was rehired. He alleged
that, among other things, on his first day back on the job he was
assigned to work at a building where he was exposed to chemicals
that made him nauseated and dizzy and that required him to visit
the emergency room on the same day. Although he filed a workers’
compensation claim for his hospitalization in January 2005, his
claim was denied by the Georgia State Board of Workers’
Compensation. Petitioner alleged that, after he was reinstated,
his coworkers and supervisors continued to harass him because of
his religious beliefs.
On October 4, 2007, petitioner signed a settlement agreement
in which he agreed to the dismissal of his lawsuit against Fulton
County in exchange for $150,000 (settlement agreement). The
settlement agreement stated that it was intended to resolve the
suit brought by petitioner against Fulton County for “violations
of Title VII of the Civil Rights Act of 1964, First and
Fourteenth Amendments of the United States Constitution and a
violation of Section 1983.” The settlement agreement provided
that petitioner agreed to release Fulton County from any right to
damages he may have had for “personal injuries, contractual
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damages, losses and damage to personal property, or any other
losses or expenses of any kind (including attorneys’ fees)
arising from” any actions or omissions of Fulton County. As a
condition of the settlement agreement, petitioner also agreed to
retire from his employment with Fulton County.
Petitioner’s attorney received the $150,000 pursuant to the
settlement agreement, deducted attorney’s fees of $60,000, and
distributed the remaining $90,000 to petitioner. The attorney’s
law firm issued petitioner a Form 1099-MISC, Miscellaneous
Income, which stated that he received income of $90,000 from the
settlement agreement. Petitioner did not report that income on
his tax return. However, he did include a prominently inscribed
asterisk next to the line for reporting wages on his Form 1040,
U.S. Individual Income Tax Return. In a note at the bottom of
the return, he wrote: “Discrimination Law Suite [sic] settled
with Fulton County Govt; (Employer) towards Expenses + Losses for
15 years in the case.”
Respondent issued a notice of deficiency to petitioner dated
November 30, 2009. In the notice of deficiency, respondent
determined that petitioner’s income should be increased by
$90,000 because of the income from the settlement agreement.
Petitioner timely filed his petition with this Court.
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OPINION
As a general rule, the Commissioner’s determinations set
forth in a notice of deficiency are presumed correct, and the
taxpayer bears the burden of proving otherwise. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).
Gross income generally includes all income from whatever
source derived. Sec. 61(a). The definition of gross income is
broad in scope, while exclusions from income are narrowly
construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
Damages (other than punitive) received on account of personal
physical injuries or physical sickness may generally be excluded
from gross income. Sec. 104(a)(2). For the damages to be
excluded under this provision, the underlying cause of action
must be based in tort or tort-type rights and the proceeds must
be damages received on account of personal physical injury or
sickness. Commissioner v. Schleier, supra at 337.
Where damages are received pursuant to a settlement
agreement, the nature of the claim that was the actual basis for
settlement controls whether such damages are excludable under
section 104(a)(2). United States v. Burke, 504 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.
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1987); Church v. Commissioner, 80 T.C. 1104, 1106-1107 (1983).
To justify exclusion from income under section 104, petitioner
must show that his settlement proceeds were in lieu of damages
for physical injuries or physical sickness. See Green v.
Commissioner, 507 F.3d 857, 867 (5th Cir. 2007), affg. T.C. Memo.
2005-250; Bagley v. Commissioner, 105 T.C. 396, 406 (1995), affd.
121 F.3d 393 (8th Cir. 1997). The determination of the nature of
the underlying claim is factual. Bagley v. Commissioner, supra
at 406; 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. See Knuckles v. Commissioner, 349 F.2d 610, 613 (10th
Cir. 1965), affg. T.C. Memo. 1964-33; Robinson v. Commissioner,
supra at 126. If the settlement agreement lacks express language
stating what the amount paid pursuant to that agreement was to
settle, the intent of the payor is critical to that
determination. Knuckles v. Commissioner, supra at 613; see also
Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per
curiam T.C. Memo. 1960-21. Although the belief of the payee is
relevant to that inquiry, the character of the settlement payment
hinges ultimately on the dominant reason of the payor in making
the payment. Agar v. Commissioner, supra at 284; Fono v.
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Commissioner, 79 T.C. 680, 696 (1982), affd. without published
opinion 749 F.2d 37 (9th Cir. 1984).
Petitioner contends that the payment he received from his
settlement agreement was to compensate him for his physical
injuries, i.e., his heart attack and the dizziness and vomiting
he experienced the day he returned to work, which required him to
be treated in the emergency room. Although it did mention
“personal injuries” among a boilerplate list of other claims from
which he agreed to release Fulton County, the settlement
agreement did not allocate any portion of the payment to
compensate petitioner for his physical injuries. We have held
that the nature of underlying claims cannot be determined from a
general release that is broad and inclusive. See Connolly v.
Commissioner, T.C. Memo. 2007-98. As part of the settlement
agreement, petitioner also agreed to retire from his employment
with Fulton County, suggesting that at least part of the payment
should be considered severance pay.
The complaint itself, although it mentioned petitioner’s
physical injuries, did not specifically seek relief for those
physical injuries. Instead, it sought backpay, back benefits,
liquidated damages, attorney’s fees, and compensatory and
punitive damages for intentional discrimination. The complaint
never connected petitioner’s heart attack or other physical
injuries with petitioner’s claims for damages.
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Given that the complaint placed little emphasis on
petitioner’s physical injuries, that the settlement agreement’s
only mention of “personal injuries”2 was in boilerplate, and that
the record in the instant case contains no other evidence showing
that any part of the settlement was for personal injuries, we
conclude that petitioner has failed to prove that it was Fulton
County’s intent to compensate him for his physical injuries.
Rather, it appears that one of Fulton County’s primary
motivations was securing his retirement, and, consequently, at
least a portion of the amount petitioner received should be
considered severance pay. Petitioner has the burden of proof on
the issue, and he has failed to show that any portion of the
amount he received pursuant to the settlement agreement was to
compensate him for physical injuries. Accordingly, we sustain
respondent’s determination that the $90,000 petitioner received
under the terms of the settlement agreement is taxable.
The second issue we consider is whether petitioner is liable
for the accuracy-related penalty pursuant to section 6662(a).
Generally, the Commissioner bears the burden of production with
respect to any penalty, including the accuracy-related penalty.
Sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
To meet that burden, the Commissioner must come forward with
2
We also note that “personal injuries” is a broader category
than “physical injuries.” See Venable v. Commissioner, T.C.
Memo. 2003-240, affd. 110 Fed. Appx. 421 (5th Cir. 2004).
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sufficient evidence indicating that it is appropriate to impose
the relevant penalty. Higbee v. Commissioner, supra at 446. The
Commissioner has the burden of production only; the ultimate
burden of proving that the penalty is not applicable remains on
the taxpayer. Id.
Subsection (a) of section 6662 imposes an accuracy-related
penalty of 20 percent of any underpayment that is attributable to
causes specified in subsection (b), including a “substantial
understatement” of income tax. There is a “substantial
understatement” of income tax for any tax year where the amount
of the understatement exceeds the greater of 10 percent of the
tax required to be shown on the return for the tax year or
$5,000. Sec. 6662(d)(1)(A). In his petition, petitioner failed
to assign error to respondent’s determination to impose a penalty
pursuant to section 6662(a). We have held that a taxpayer who
fails to assign error to a penalty is deemed under Rule 34(b)(4)
to have conceded the penalty, notwithstanding that the
Commissioner failed to produce evidence that the imposition of
the penalty was appropriate. See Swain v. Commissioner, 118 T.C.
358 (2002). Moreover, petitioner failed to raise the issue at
trial. Accordingly, we sustain respondent’s determination of the
section 6662(a) penalty.
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In reaching these holdings, we have considered all the
parties’ arguments, and, to the extent not addressed herein, we
conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.