PURSUANT TO
Decision will be entered under Rule 155.
GUSTAFSON,
The Internal Revenue Service ("IRS") determined a deficiency of $7,705 in and a section 6662(a) accuracy-related penalty of $1,541 on petitioner Joshua Smith's Federal income tax for 2010. This case arises from Mr. Smith's timely petition for redetermination of the tax and penalties in the statutory notice of deficiency.
Respondent has conceded that the unreported income at issue is not subject to self-employment tax. Additionally, respondent has conceded that Mr. Smith is not liable for the corresponding section 6662(a) accuracy-related penalty of $1,541. Thus, the only issue remaining for decision is whether the unreported income2014 Tax Ct. Summary LEXIS 95">*96 at issue was a settlement payment for physical injuries or physical sickness and therefore excludable from Mr. Smith's gross income under section 104(a)(2). We hold that it was not.
The parties jointly moved to submit this case for consideration pursuant to Rule 122, reflecting their agreement that the relevant facts could be presented without a trial, and we granted that motion.2 We incorporate by this reference the parties' stipulation of facts filed April 7, 2014, and the exhibits attached thereto.3 Mr. Smith resided in the State of Pennsylvania when he filed his petition.
Mr. Smith was formerly employed as a server with MBFGMTW Limited Partnership d.b.a. Monterey Bay Fish Grotto ("MBFG") from approximately June 30, 2005, until MBFG2014 Tax Ct. Summary LEXIS 95">*97 terminated his employment on January 30, 2007. While he was employed by MBFG, Mr. Smith was diagnosed with attention deficit hyperactivity disorder ("ADHD") and major depressive disorder ("MDD"). Both ADHD and MDD are disabilities within the definition of "disability" in the Americans with Disabilities Act of 1990 ("ADA"), Pub. L. No. 101-336, 104 Stat. 327.
As part of his treatment regimen he was prescribed a stimulant medication called Desoxyn (methamphetamine hydrochloride). One of Desoxyn's side effects is appetite suppression. This was problematic for Mr. Smith, who is small in stature. He is only five feet six inches tall, and his weight fluctuated between 120 and 140 pounds before he began taking the medication. Mr. Smith's primary care physician was concerned about the appetite suppressive effects of Desoxyn on his general physical and mental health, particularly if he lost any weight. As a result, the physician recommended that he consume as many calories as possible whenever he was able to do so.
This medical advice conflicted with MBFG's longstanding policy prohibiting servers from eating during a shift. The only exception that MBFG allowed to the2014 Tax Ct. Summary LEXIS 95">*98 policy was that a food server could eat if less than 30 minutes remained before the restaurant stopped seating guests, and if that server had no guests remaining at his or her assigned tables. First and second violations of the policy resulted in written warnings, while a third violation resulted in termination of the server's employment.
Mr. Smith recognized the tension between his physician's recommended eating regime and MBFG's restrictive meal policy. He informed MBFG of his disability and requested to be excepted from the policy. For a brief period, MBFG initially excepted Mr. Smith from the policy and he was permitted to eat without restrictions as his appetite demanded.
However, management's patience with Mr. Smith's accommodation quickly waned, and on January 30, 2006, Mr. Smith was informed that MBFG would no longer accommodate his disability and that he was again subject to the meal policy. At that meeting MBFG explained the terms of the meal policy to Mr. Smith as follows: Mr. Smith was permitted to take up to two eight-minute breaks per shift, but only after first receiving permission from the manager; Mr. Smith was permitted to eat only pre-prepared food that was bought2014 Tax Ct. Summary LEXIS 95">*99 outside the restaurant; and Mr. Smith was permitted to consume his food only while standing in a particular location in the kitchen, in full view of all kitchen employees. Less than two weeks later, Mr. Smith was called to a meeting with MBFG management and disciplined for violating the meal policy. He was told that he would be terminated if he violated the meal policy again.
Mr. Smith submitted a questionnaire to the Pennsylvania Human Relations Commission ("PHRC") on February 16, 2006, alleging that MBFG had engaged in discriminatory conduct. The following day Mr. Smith notified MBFG in writing of his decision to pursue formal charges of discrimination as a result of its meal policy, retaliatory conduct, and refusal to accommodate his disability. On July 21, 2006, the PHRC dismissed Mr. Smith's complaint because the complaint did not establish probable cause to show discrimination.
MBFG terminated Mr. Smith on January 30, 2007. In response to his termination, Mr. Smith filed on July 24, 2007, a civil lawsuit against MBFG in the U.S. District Court for the Western District of Pennsylvania, Civil No. 07-01032, pursuant to the ADA and2014 Tax Ct. Summary LEXIS 95">*100 the Pennsylvania Human Relations Act,
In March 2010 Mr. Smith and MBFG executed a "Confidential Settlement Agreement and General Release". The settlement agreement described Mr. Smith's claims as follows: [Mr. Smith] * * * does hereby fully and forever release, discharge and hold harmless MBFG * * * from any and all liability upon claims, causes of action or obligations of every nature whatsoever, whether known or unknown, arising out of or relating to his employment and termination from employment or to any other act, event, failure to act or thing which has occurred or was created at any time before the date on which this Agreement2014 Tax Ct. Summary LEXIS 95">*101 is signed. Without limiting the generality hereof, this release covers claims or causes of action based upon torts (such as, for example, negligence, fraud, defamation, wrongful discharge); express and implied contracts; federal, state or local statutes and ordinances, including those which regulate employment practices (such as, for example, The Age Discrimination in Employment Act of 1967, The American [sic] with Disabilities Act, Title VII of the Civil Rights of 1964, the Pennsylvania Human Relations Act); and every other source of legal rights and obligations whatsoever. Plaintiff has requested, and the parties have agreed, that Five Thousand Dollars of the total payment be allocated to
On July 2, 2012, the IRS mailed Mr. Smith the notice of deficiency, which determined a deficiency in tax of $7,705, and on October 5, 2012, Mr. Smith filed his petition in this Court. On April 7, 2014, the parties filed their stipulation of facts and jointly moved to submit the case under Rule 122. By order dated April 7, 2014, the Court ordered the parties to submit simultaneous memoranda briefs by July 7, 2014. Mr. Smith did not file a brief, but we construe his position to be that the2014 Tax Ct. Summary LEXIS 95">*103 unreported income is excludable from his gross income pursuant to section 104(a)(2) because it was allocated to pain and suffering. Respondent's brief argues that the unreported income represents settlement proceeds that were not received on account of personal physical injuries or physical sickness and therefore are not excludable from gross income under section 104(a)(2).
As a general rule, the IRS'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);
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 narrowly2014 Tax Ct. Summary LEXIS 95">*104 construed.
Section 104(a) provides that 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 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.
Where damages are received pursuant to a settlement agreement like Mr. Smith's, the nature of the claim2014 Tax Ct. Summary LEXIS 95">*105 that was the actual basis for settlement controls whether those damages are excludable under section 104(a)(2).
Where there is a settlement agreement, the determination of the nature of the claim is usually made by reference to the agreement.
We surmise from Mr. Smith's petition that his position is that the unreported income is excludable from his income under section 104(a)(2) because it was partially allocated as damages for pain and suffering under the settlement agreement. (He makes no contention that the amounts were for medical care.
As we have noted, the settlement agreement does not specifically mention any claims for physical injuries or physical sickness. And by its terms (quoted above), the settlement agreement does not provide that any portion of the payment was allocable to claims for physical injuries or physical sickness. Rather, it allocates the payment to "lost wages", "pain and suffering, emotional distress and the expense of suit." This Court has noted, however, that "'pain and suffering' is a broad term that includes
When we look to Mr. Smith's Federal court complaint to see whether it states more particular claims (i.e., physical injuries or physical sickness) that would justify exclusion,
The character of the settlement payment hinges ultimately on the dominant reason of the payor in making the payment.
1. All section references are to the Internal Revenue Code (26 U.S.C.) in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩
2. The burden of proof is generally on the taxpayer,
3. The stipulated record consists of: the facts alleged in Mr. Smith's petition filed with this Court on October 5, 2012, to the extent they are admitted in respondent's answer filed on November 30, 2012; the stipulation of facts; and the exhibits attached thereto.↩
