2006 Tax Ct. Memo LEXIS 48">*48 Ps did not include in their 2001 Federal income tax return
payments totaling $ 135,000, remitted pursuant to a settlement
agreement entered into between petitioner-husband (P-H) and the
District of Columbia. Under the terms of the settlement
agreement, the proceeds at issue were designated as attorney's
fees and "claims and out-of-pocket expenses", and were to be
considered as non-taxable amounts pursuant to
I.R.C. Ps were not furnished with a timely, properly issued Form
1099-Misc., Miscellaneous Income.
Held: Ps are not entitled to exclude the $ 135,000
settlement payment from their gross income under
I.R.C. The record does not establish that P-H received any part
of the $ 135,000 sum on account of personal physical injury or
physical sickness, as required by
penalties pursuant to
available to consider Ps claim for suspension2006 Tax Ct. Memo LEXIS 48">*49 of interest under
MEMORANDUM FINDINGS OF FACT AND OPINION
NIMS, Judge: Respondent determined a deficiency of $ 146,316 in petitioners' 2001 Federal income tax, as well as an accuracy-related penalty under
FINDINGS OF FACT
Some of the2006 Tax Ct. Memo LEXIS 48">*50 facts are stipulated and are found accordingly. The stipulation of facts, the supplemental stipulation of facts, and the attached exhibits are incorporated herein by this reference. At the time of the filing of their petition, petitioners resided in Washington, D.C.
Petitioner Jesse Goode was employed by the District of Columbia (the District) for approximately 8 years when placed on paid administrative leave on January 19, 2000. At that time, he was serving as the general counsel to the District's Department of Human Services. (Petitioner Tawara Goode is a party to this case solely because she filed a joint Federal income tax return with petitioner Jesse Goode for the taxable year at issue, and references herein to petitioner in the singular are to Jesse Goode).
Precipitating the District's adverse employment action against petitioner was a series of news reports in the Washington Post probing numerous, deplorable incidents of neglect and abuse suffered by residents of the District's housing facilities for individuals with developmental disabilities, which was under the aegis of the Department of Human Services. On January 17, 2001, petitioner filed suit against the District with2006 Tax Ct. Memo LEXIS 48">*51 the United States District Court for the District of Columbia, seeking damages and declaratory and injunctive relief. The gravamen of petitioner's complaint -- comprised of two underlying counts alleging, respectively, the District's infringement of petitioner's
Petitioner did not serve the complaint on the District. Petitioner's reason for this was to preserve the viability of one or both of the2006 Tax Ct. Memo LEXIS 48">*52 asserted claims from the pending expiration of the period of limitations without impeding the progress of the settlement negotiations, which had reached a critical juncture.
Petitioner entered into a settlement agreement and general release with the District on May 14, 2001 (the settlement). The provided for, among other specified items of consideration, the termination of petitioner's employment, a mutual omnibus release encompassing any and all litigation-related claims between the parties, and the remuneration by the District of the following compensatory sums: (i) $ 15,904.33, allocated as severance and accrued leave; (ii) $ 103,250, designated as petitioner's "claims and out-of-pocket expenses"; and (iii) $ 31,750, earmarked as petitioner's counsel fees and costs. Payment of petitioner's counsel fees and costs was remitted directly to petitioner's attorneys, in accordance with the settlement.
The settlement, in a provision accompanying the enumeration of the compensatory payments, contains the following characterization of the respective $ 103,250 and $ 31,750 amounts (cumulating $ 135,000, the disputed settlement amount) as: compensatory damages pursuant to
Relying solely on such representation set forth in the settlement, petitioners did not include (and did not provide supplemental disclosure of) the disputed settlement amount in their 2001 gross income. Of the aggregate settlement proceeds, petitioners reported only the $ 15,904.33 severance payment, as properly reflected in a Form W-2, Wage and Tax Statement, which was duly issued by the District.
The District's Office of the Chief Financial Officer (the OCFO) issued a Form 1099-Misc., for the 2001 taxable year that was faulty in two respects: it erroneously disclosed the disputed settlement amount as $ 357,462, and was never delivered to petitioners. A corrected Form 1099-Misc., for taxable year 2001 (the restated 1099) inaccurately restated the disputed settlement amount as $ 119,154.33, listed an incorrect address for petitioner under2006 Tax Ct. Memo LEXIS 48">*54 the form's appropriate caption (corresponding to the address of one of the law firms that represented petitioner in the settlement), and was not ultimately sent to petitioner's correct address until March 24, 2004. Correspondence from the OCFO to petitioner, dated March 22, 2004, indicates that the numerical error in the restated 1099 is the result of including the $ 15,904.33 severance payment in the disputed settlement amount and excluding the $ 31,750 attorney's fees compensation.
OPINION
1. Burden of Proof
The parties dispute whether the burden of proof in this case has been shifted to respondent pursuant to
2. Applicability of
Qualification for the
The determination as to whether damages received pursuant to a settlement fall within the purview of the conjunctive two-prong test is a factual one.
Express allocations in a settlement, identifying payment amounts deemed eligible for the
As elucidated in the legislative history of the SBJPA amendment, "emotional distress" denotes "symptoms2006 Tax Ct. Memo LEXIS 48">*58 (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress." H. Conf. Rept. 104-737, at 301 n.56 (1996),
Judicial approbation of express settlement allocations for Federal income tax purposes is also not warranted where circumstantial factors reveal that the designation of the settlement proceeds was not the result of adversarial, arm's length, and good faith negotiations, and is incongruous with the "economic realities" of the taxpayer's underlying claims. See
Notably, the final sentence of
Petitioner contends that the express characterization of the disputed settlement amount is dispositive for purposes of the applicability of the
For the reasons delineated below, we do not endow the settlement's characterization of the disputed settlement amount with dispositive effect for purposes of the applicability of the
Furthermore, the allocation of the disputed settlement amount does not satisfy the exclusion provided in the final sentence2006 Tax Ct. Memo LEXIS 48">*61 of
The bona fide nature of petitioner's averred symptoms was substantiated by the testimony of Arabella Teal (Teal), a former official in the District's Office of the Corporation Counsel and the District's principal representative in the settlement. In stating that she could not recall requesting, receiving, or reviewing any medical documentation corroborating petitioner's illness, Teal remarked that the settlement discussions did include petitioner's "emotional and physical reaction to what had happened, because that's one of the things that [the District] had to evaluate in terms of deciding whether to settle the case." (Emphasis added.) Teal stated that although she may have neglected to confirm independently petitioner's physical condition, she did not doubt the veracity of his alleged2006 Tax Ct. Memo LEXIS 48">*62 health complications, because she regarded petitioner's representative as a prominent, trustworthy attorney and observed petitioner in what may be inferred to have been impaired physical health.
Teal's testimony excerpted above conflates petitioner's emotional suffering with the consequent physical reaction petitioner experienced as a result of that trauma. This illustrates the fact that the District conceived of petitioner's illness, although evidently grievous, as emanating from a physical manifestation of emotional distress encompassed within the limitation set forth in the penultimate sentence of Q You testified that you had a physical and emotional reaction to this whole process. Did this publicity have any effect on that, and if so, what? A Yes. This was a significant component2006 Tax Ct. Memo LEXIS 48">*63 of the whole problem. * * * But there is my name in The Washington Post. You know, my name is at the city council hearing when they had the investigation. So yes, all this publicity had a huge impact on me.
By contrast, petitioner's brief attributes his symptoms exclusively to the putative Graham assault: "Ms. Graham's offensive conduct was the only predicate for the injuries * * * [petitioner] sustained, and, hence, the basis for the * * * [District's] decision to settle * * * [petitioner's] claim for physical pain and suffering."
Additionally, the allocation of the disputed amount was not apparently contested by the District during the course of the settlement negotiations with petitioner, and thus, the designation of the proceeds is not consonant with the nature of petitioner's underlying claims. Petitioner's complaint against the District contains no mention or allusion to the putative Graham assault. Petitioner's explanation for such conspicuous omission was that the complaint, which was never served on the District, was filed close to the expiration of the period of limitations for one or both of the causes of action, and was drafted in a sterile manner without reference2006 Tax Ct. Memo LEXIS 48">*64 to the putative Graham assault so as not to disrupt the progress of the settlement negotiations. Apart from petitioner's self-serving testimony, however, there is no evidence present in the record to establish that the putative Graham assault ever occurred.
Moreover, Teal testified at trial that the District's standard settlement agreements, utilized to resolve disputes of a similar nature to that involving petitioner, were relatively brief and rudimentary in format, and did not specify the designation of the compensatory damage payments. According to Teal's recollection at trial, she perceived of the characterization of the disputed settlement amount as outside the scope of the controversy between the District and petitioner. Teal had been informed that the settlement allocation did not present any potential adverse ramifications for the District because, irrespective of the express settlement allocation, the District would defer to respondent's ultimate determination of the applicability of the
Petitioner asserts that the characterization of the disputed settlement amount was the result of quid pro quo negotiation because petitioner's municipal income2006 Tax Ct. Memo LEXIS 48">*65 tax liability, derived from his computation of adjusted gross income for Federal income tax purposes, would be correspondingly lower if the
Petitioner argues that the $ 31,750 designated as attorney's fees reimbursement is distinguishable from the remainder of the disputed settlement amount because the attorney's fees payment was remitted directly to petitioner's counsel. (Respondent concedes, though, that the attorney's fees compensation is deductible as a miscellaneous itemized deduction.) The Supreme Court, in
3. Accuracy-Related Penalty
Respondent determined an accuracy-related penalty for substantial understatement of income tax for the 2001 taxable year.
Petitioner contends that there was reasonable cause to rely on the settlement's explicit characterization of the disputed settlement amount, particularly since a timely Form 1099 was not provided to him. However, in qualifying the disputed settlement amount as "non-taxable2006 Tax Ct. Memo LEXIS 48">*67 to the fullest extent permitted by law," the settlement contemplates that such allocation was not to be conceived of as a definitive pronouncement for tax purposes. (Emphasis added.) Additionally, petitioner presented no evidence that he consulted with a professional tax adviser, or took any other independent action, to confirm the treatment of the disputed settlement amount under Federal tax law. In light of our findings above concerning the nonadversarial nature of the settlement negotiations and the dubious origin of petitioner's ailments, the mere fact that petitioner did not receive the Form 1099 does not establish the applicability of the reasonable cause and good faith exception to the
To the extent the parties'
4. Interest
Petitioners challenge respondent's assessment of interest by invoking
Respondent argues that jurisdiction to consider petitioner's interest claim is not available here pursuant to
It is respondent's further contention that jurisdiction over petitioner's claim concerning suspension of interest under
The applicability of
To reflect the foregoing and the concessions of the parties,
Decision will be entered under