Deborah L. Watts, Petitioner

T .C . Memo . 2009-10 3 UNITED STATES TAX COUR T DEBORAH t . WATTS, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 6056-06 .

Robert M . Walsh , for petitioner] Daniel P . Ryan , ~ for respondent .

MEMORANDUM FINDINGS"O F GALE, Judge : Respondent determined a deficiency i n petitioner's 2002 Federal income tax of $10,705 and additions1to tax under section 6651 (a) (1) of $2, 4,08, under section 6651('a)'1(2' ) of $1,605, and under secti on 6654,(a ) Unless otherwise noted, all sec Internal Revenue Code of 1986, as in SERVED, MAY 18 2009 2 - issue,'and all Rule references are to the Tax Court Rules of Practice and Procedure . All dollar amounts have been rounded to the nearest dollar .

After concessions,' the issues for decision are :

(1) Whether a $52,896 payment petitioner received in'2002 in ,,connection with the settlement of a class action lawsuit against Yier,,a tomobile insurer is includible in gross income ; (2) whether f$9,3'9:6 petitioner received from the Social Security ' .11 ~,Admin~istration in 2002 is includible in gross income under sect"i''bn 86 (a) ; (3) whether petitioner was required to file a .Federal income-tax return for 2002 ; (4) whether petitioner i s 'Respondent has conceded that petitioner is not liable for a sec . 6654(a) addition to tax . Petitioner claimed entitlement to a medical expense deduction in the petition but presented no evidence relating to this issue and did not address it on brief . We therefore deem it to have been abandoned . See Estate of Atkinson v . Commissioner , 115 T .C . 26, 35 (2000), affd .,,309 F .3d 1290'(11th Cir . 2002) ; Stringer v . Commissioner , 84 T .C . 693, 708 (1985), affd . without published opinion 789 F .2d 917 (4th Cir . 1986) .

Respondent determined in the notice of deficiency that petitioner had total unreported gross income for 2002 of $60,882 in connection with payments from State Farm Mutual Automobile Insurance Co . (State Farm) and the Social Security Administration . On brief respondent takes the position that petitioner had unreported income of $52,896 from State Farm and $9,396 from the Social Security Administration, for total unreported income of $62,292 . Respondent did not move to amend his answer to assert an increased deficiency . In any event, the discrepancy in the unreported income respondent asserted has no significance, given that we have redetermined that petitioner had unreported income from-State Farm and the Social Security Administration of only $2,896 and $6,455, respectively .

entitled to a dependency exemption deduction under section 151(c) ; (5) whether petitioner is entitled to a child tax credit under section 24(a) ; and (6) whether petitioner is liable fo r additions to tax under section 6651(a)(1) and (2) .

I ~ .

FINDINGS . OF FAC T Some of the facts have . been ;sti .pulated and are incorporate d by this reference . At the time the petition was filed , petitioner resided in New Hampshire .

I .

State Farm Settlement Payment A .

Petitioner's Automobile Acciden t Petitioner married on October 8 , 1990 . On February 22,'h 1992, while living in Tusdon, Arizona, with-her husband , petitioner was injured in an -autbmob~ile : accident, the fault of a I uninsured motorist . As a result of her injuries, petitioner ! ;wa s unable to work for over a year .

At the time of the accident . pe t itioner and her husband had ' two vehicles insured .underI separat e automobile liability I insurance policies throug h State Farm Mutual Automobile Insuranc e Co . (State Farm) . Both in surance~ po f licies were purchased .by, ~ petitioner and/or her husband and had endorsements for uninsure d and underinsured motorist (UM/UIM ) coverage with policy limit o $50,000 .

Petitioner's Claim Against State Far m 4 - gllAlthough petitioner filed a lawsuit against the motorist who was at ;,fault in her accident, her counsel ascertained that the :defendant had no significant assets nor any insurance . .

Petitioner submitted a claim under her UM/UIM coverage to State Farm .for compensation for her injuries in the automobile accident :. State Farm took the position that petitioner :iwas entitled to recover under the UM/UIM coverage of only one of the two policies held by her and her husband, resulting in a n .effective policy limit on recovery of $50,000 . In taking .this position State Farm relied on anti-stacking provisions in its insurance contracts with petitioner and her husband, under which the insured was purportedly precluded from aggregating or "stacking"' his or her UM/UIM coverages under multiple State Farm policies . Petitioner thereafter agreed to settle her claim with State Farm for $32,973 and, after satisfaction of attorney's fees and costs, she and her husband received a payment of $21,887 on o r about February 2, 1996 .3 At the time she settled her claim, % petitioner anticipated incurring future medical expenses o n .account of the automobile accident but concluded that th e 2"Stacking" is "the practice by which insureds may seek indemnification from the same coverage under two or more policies ." 631 .(Ariz . 1995) (citing Widiss, Uninsured and Underinsured Motorist Insurance, sec . 40 .1, at 237 (2d ed . 1995)) .

State Farm Mut . Auto . Ins . Co . v . Lindsey, 897 P .2d 3This 1996 payment is not at issue in this case .

settlement was advisable in view<o f the-costs of furthe r litigation and State Farm s position that the ' limit . on her ; I recovery was $50,000 .

C . ' Class Action Lawsuit Against State Far m After petitioner had greed to s ettle with State Farm ,-th e Arizona Supreme Court decided State Farm Mut . Auto . In s Lindsey ; 897 (cid:127)P .2d 631 (Ariz . 1995), in which it held that anti- stacking provisions in certain other State Farm automobile, .

liability insurance policies, simila I to those that State Farm had invoked against petitioner, were ineffective to preclude .

!

stacking .

Id . at 331-332 . .

After the Lindsey decision peti Toner .became a member of th e plaintiff class in a class action lawsuit against State Farm°tha had been filed on July 21, 1995, in ima County Arizona Superior Court (superior court) . The class action plaintiffs alleged tha t "State Farm's refusal . to allow . Plaintiffs to `aggregate' or `stack' multiple uninsured and/or .underinsured motorist coverage provided by State Farm policies constitutes a breach of contract ." The plaintiffs also raised claims for relief based o breach of covenant of good faith and fair dealing in connectio n with their contracts of insurance with State Farm, fraud i n connection with the denia l of benefits under the plaintiffs' policies, violation of the Arizona Consumer Fraud Act (A .R .S . .

4 4' 1522(A)) in connection with the denial of stacking of uninsured 6 - coverage in multiple policies, breach of fiduciary duty .,; and r racketeering as proscribed by A .R .S . 13-2301(D)(4) . The plaintiffs requested as relief compensatory damages, treble damages, punitive damages, attorney's fees and costs, and prejudgment interest .

D .

The class action lawsuit was settled on September 6, 2001, b'y means of a written settlement agreement (settlement .agreement) . Pursuant to the settlement agreement, State Farm deposited into trust $45,062,945, of which $29,873,75 0 constituted "Class Member Settlement Funds" .(settlement funds) t o be used~to pay certainof the plaintiffs ; namely, "Eligible Class Members" .9 Under the settlement agreement, each Eligible Class Memberwwas entitled to receive a pro rata share of the settlemen t funds (plus interest accruing before disbursement) provided th e Eligible Class Member executed and returned an individual releas e to State Farm . Eligible Class Members included those plaintiff class,members whom the superior . court had ruled met the'following criteria, as described in the settlement agreement :

y (and each person who has a claim for the .

tAn perso n wrongful death of a person) who is, or was , The remaining funds were allocated to (1) "Seventh Yea r Class Members" whose claims apparently were subject toa greater litigation hazard that State Farm would prevail in a statute of limitations defense, and (2) attorney's fees and costs .

.

(A) insured under multiple automobile liability insurance policies that. : (ii) were purchased by one insured"' on different vehicles ; (ii) included uninsured ("UM") and/or unilderinsured ("UIM") motorist coverage ; and (iii) were delivered or issued for delivery in Ariz na by State Farm with respect to a motor vehicle re istered olr principally garaged in Arizona ; (B) who sustained injury or death as a result of the fault of an insured [sic6] and/or underinsured motorist ; an d (C) who was paid * * * the UM and/or UIM motorist coverage limits on one automobile liability policy issued by State Farm, but received no payment from any other UM and/or .UIM coverage provided by any other automobile liability policy . described above .

The settlement agreement excluded from the category o f Eligible Class Members : O "Identified Plaintiffs" ; i .e ., thos I I I class members whom the superior court concluded had policies wit anti-stacking clauses that were valid and enforceable ; and (2) "Fully Compensated Plaintiffs" ; i .e ., those class members whom the superior court concluded were fully compensated for thei r injuries and not entitled to any recovery in the litigation .

'We assume in deciding this case that petitioner was treate by State Farm and the Pima-County Arizona Superior Cour t (superior court ) as meetin g the "one insured " requirement in ~ connection with the polic es purchased by her and/ or her husban d by virtue of Arizona ' s community property laws . See State Farm Mut . Auto . Ins . Co . v . Lin dsey , P . 2d at 634 .

8,97 6Given the context , we find tha t the use of the term "insured " in this clause o f the settlement agreement was a I f typographical error and th at " uninsured " was intended by th e parties to the agreement .

As noted, an Eligible Class Member was required to execute a prescribed individual release in order to receive his other pro rata share of the settlement funds . The, terms of the prescribe d individual release are not in the record .

However , pursuant to k the settlement agreement , every Eligible Class Member , regardless of whether he or she executed an individual release and received settlement funds , became subject to a general class release .whic h released State Farm -", from any and all claims , demands, suits , causes-of action , damages, costs , fees, expenses , and civi l liabilities of any nature whatsoever in law or equity arisin g from the transaction or occurrence giving rise to the claims in the [class action ] Complaint" .

. Receipt of Paymen t Petitioner was one of . 568 Eligible Class Members .who received pro rata disbursements from the settlement funds that, with,ac~crued interest , had grown to $30 , 041,902 as . of January 31, 2 1;002 . Sometime in 2002 petitioner received a $52,896 payment pursuant to the settlement agreement as her pro rata portion o f the settlement funds . During that year petitioner was issued a Form 1099 - MISC , Miscellaneous Income , reflecting the payment .

II .

Social Security Administration Payment s During 2002 petitioner was disabled as a result of reflex dystrophy syndrome .

She received payments totaling $ 9,396 from the Social Security Administration on account of this disability and was issued a Form SSA- 1099, Social Security Benefi t Statement, reflecting the payments .

.During 2002 petitionek and her hhusband were married but wer ~ experiencing marital difficulties .

III . Dependency Exemption beduction and Child Tax Credit Petitioner and her husband had two children during thei r marriage--TJM and TDM . 7 Sometime! around 2000 petitioner moved t o New Hampshire . As noted, petitione r remained married throughou t 2002 .

She and her husband obtained a final decree of divorce'i n 2005 . They had no written agreement concerning the custody o f TJM and TDM during 2002 .

.

IV .

Tax Advic e Petitioner consulted an accountEnt as to the proper tax' .'

treatment of the $52,896 payment from State Farm . The accountan advised petitioner that the payment might or might not be taxab l and that petitioner should make further inquiry into its ta x consequences .

V .

Notice of Deficiency Petitioner did not file a Federal income tax return fo r 2002 . Respondent prepared a substitute for return and o n December 27, 2005, issued- notice of, deficiency to petitione r for 2002 in which he deter fined that petitioner had unreporte d 7TJM was born on Sept! 13, 199 3 and TDM was born on Dec 17, 1996 .

10 - income of $60,882 as disclosed by third-party payors .' Respondent further determined that petitioner's filing status was single , thatppetitioner was entitled to one personal exemption and no credits, and that petitioner was liable .for additions to tax under section 6651(a)(1) and (2) as previously described .

Petitioner filed a timely petition for redetermination .-

OPINION

Generally, the determinations in the notice .of deficienc y are presumed correct, and taxpayers bear the burden of proving that,. the determinations are in error . See Rule 142(a) ; .,' Welch v .

! Helvering , 290 U .S . 111, 115 (1933) . Petitioner has not claimed or' shown entitlement to any shift in .the burden of proof pursuant to section 7491(a) . As discussed infra , respondent bears the burden of production with respect to .the additions to tax he determined, pursuant to section 7491(c) .

Generally, gross income includes all income from whatever source derived unless excluded by a specific provision of the Internal Revenue Code . See sec . 61(a) ; sec . 1 .61-1(a),aIncome Tax Regs? Section .61(a) broadly applies to any accession t o 'wealth ; statutory exclusions from income are to be narrowl y construed . See Commissioner v . Schleier , 515 U .S . 323,"327 (19 .95) . ; United States-v . Burke , 504 U .S . 229, 233 (1992) ; Commissioner v . Glenshaw Glass Co . , 348 U .S . 426, 431 (1955) .

A 'See supra note 1 .

taxpayer must demonstrat e that he o r 11 - scope of any statutory exc lusion . See Commissioner v . Schleier ; supra at 336-337 ; United States v; . Burke , supra at 233 .

I I .

Unreported Income ' A .

State Farm Settlement Payment - We first decide whether petitioner must'include in her 200 2 gross income the $52,896 p a yment she received pursuant to the, settlement agreement with state Farm .

I 1 .

Applicable Internal R venue Code Provisio n Petitioner contends that the'settlement payment is excludable from gross income under section 104(a)(2) because'`i t constitutes damages received on account of personal physica l injuries she suffered in ari automobile accident . Respondent , counters that the payment was not,to settle a tort claim o r t o pay petitioner on account of persona physical injuries but rather to redress contract claims . Thus, respondent argues ;th e payment fails the two-part test under Commissioner v . Schleier., supra at 337, and therefore is not excludable from gross incom e under section 104(a)(2) .

We believe the partie s have . miscast the issue as governed by section 104(a)(2) . Sectio 104(a)(2) provides an exclusion fro m gross income for "the amount of any damages (other than punitive damages) received (whether by suit on agreement * * * ) on account!,of,personal physical injuries or physical sickness" . The regulations interpreting section 104(a)(2) provide :

12 - Section 104(a)(2) excludes from gross income the amount of9any damages received"' (whether by suit or agreement) on account of personal injuries or sickness . The [statutory] term "damages received (whether by suit or agreement" means an amount received * * * through prosecution of a legal suit or action based upon tort l or,tort type rights , or through a settlement agreement entered into in lieu of such prosecution . [Sec . 1 .104- I(c), Income Tax Regs . ; emphasis added .

] Petitioner did not bring a .suit, or settle one, based on tort o r tort type rights . The suit and settlement at issue were not against the motorist whose fault caused her injury or against thati!motorist's insurer . Petitioner sued her own insure r concerning a disagreement over the contractual terms ofipolicies she and her spouse had purchased--specifically, whether anti stacking clauses in those policies entitled State Farm to deny coverage under the second policy . The settlement petitione r reached with State Farm was therefore not a "settlement agreemen t entered into in lieu of" a prosecution " based on tort .or type rights"i ;, it was a settlement of a contract dispute concerning th e 'terms of an insurance policy she had purchased that purported to indemnify her against injury caused by an uninsured motorist .

'The regulations do not reflect the 1996 amendment''of sec ,104(a),(2) wherein the phrase "(other than punitive damages)" wa s added after " damages" . See . Small Business Job Protection Act of 1996 ; Pub . L . 104-188, sec . 1605(a), 110 Stat . 1838 .

Section 104 (a) (3) generally prod ides an exclusion¹⁰ fro m gross income for amounts received through accident or health insurance * * for personal injuries or sickness (other than amounts received by an employee, to the .extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer) * * * .

The regulations . interpreting section 104(a)(3) provide :

Section 104(a)(3) excludes from gross income amounts received through accident or health insurance for personal injuries or sickness (other than amounts received by an employoe, to the extent that such amounts (1) are attributable to contributions of the employer which were not includible in the gross income of the employee, or (2) are paid by the employer) . * If, therefore, an individual purchases a policy of accident or health insurance out of his . own funds, amounts received thereunder for personal injuries or sickness are excludable from his gross income under section 104(a)(3) . * * * [Sec . 1 .104-1(d), Income Tax Regs . ] Accordingly, under the regulations, where an individual ha s purchased an accident or health insurance policy, the section 104(a)(3) exclusion applie⁴ to amoun s "received thereunder fo r personal injuries or sickness" .

The regulations under section 104(a)(3) do not address th e situation where the insured receives amounts only after { initiation and settlement of a lawsuit against the issuer of the I accident or health insurance policy .

The parties apparentl y believe that the interposing of a lawsuit between the insured and "The exclusion does not extend Ito amounts attributable to deductions allowed under sec . 213 for any prior taxable year .

the insurer in this case causes the payment petitioner receive d from State Farm to constitute "damages" that may be excluded from income only by satisfying the requirements of section 104(a)(2) .

ik We disagree ., As more fully discussed below, .we conclude:. tha t petitioner's settlement payment from State Farm was receive d "through" accident or health insurance "for" personal injuries o r sickness within the meaning of section 104(a)(3) and is therefor e .excludable, up to the policy limits, under that section . + .To decide whether the . settlement payment petitioner receive d is excludable under section 104(a)(3), we must determine whether it .constitutes an amount received (1) "through" (2) "accident or health insurance" (3) "for" personal injuries or sickness . See Marsh V . Commissioner , T .C . Memo . 2000-11, affd . 23 Fed ; Appx .

874 (9th Cir . 2002 ) 2 .

Whether Petitioner's Automobile Liability Policy Was "Accident or Health Insurance " ~; .We believe there can be no serious dispute that petitioner's automobile liability policy on which State Farm denied coverag e was "accident or health insurance" within the meaning of section 104(a)(3) .11 In Marsh v . Commissioner , supra , we .assumed that an b I amounttjreceived in settlement of litigation over a claim under the uninsured motorist coverage of an automobile liabilit y ."There is also no dispute in this case that the State Farm policies at issue were purchased by petitioner or her spouse and not by any employer of either .

J; insurance policy was in theory excludable under section 104'(a)(3) .12 The Commissioner has taken a similar position in ' a is published revenue ruling that disability payments received under a "no fault" automobile insurance' policy are excludable underl section 104(a)(3) . See Rev . Rul .!73-155, 1973-1 C .B . 50 . We accordingly hold that the uninsured motorist coverage in the State Farm automobile liability insurance policies at issue is "accident or health insurance" withi' the meaning of sectio n 104 (a) (3) .

3 .

Whether the Payment Was an Amount Received "Through" Accident or~Health Insuranc e Section 104(a)(3) requires that an excluded amount be received "through" accident or health insurance . The regulation s further clarify that an amount is excludable if an individuallhas purchased the policy and the amounts are received "thereunder", .

Sec . 1 .104-1(d), Income Ta Regs .

Marsh v . Commissioner , supra , likewise involved a claim by an insured taxpayer fo r indemnification for a personal injur⁴ under the uninsured motorist coverage of his automobile liability policy .

I As in thi s case, the insurer denied coverage on grounds subsequently found invalid by the State's highest court in other proceedings . Th e 12In Marsh v . Commissioner , T .C . Memo . 2000-11, affd . 23 Fed . Appx . 874 (9th Cir . 2002), we held that an exclusion under sec . 104(a)(3) was not available because the claim that had been settled by the insurer was based on a false statement by the insured .

C' - 16, taxpayer thereupon sued, and the insurer ultimately settled wit h the taxpayer for approximately $ 68,0.00 , . which the taxpayer sough t to,exclude under section 104(a)(3) or (2) .13 A key difference i n Marsh :, was .our finding that the taxpayer's claim of personal injury was based on his false statement .

As a result , we hel d that the payment was not excludable under section 104(a)(3 ) because ; it wasnot "for" personal injuries or sickness . We did not suggest that the payment's being a product . of litigation wit h the insurer raised an issue under the requirement that th e payment, be received "through" accident or health insurance .

''Iindeed, we assumed that .a payment in these circumstances would b e ' under an insurance policy" .,'1 4 Petitioner received the $52,896 payment at issue as he r share ;of the settlement of a class action lawsuit against State Farm . In order to be eligible to receive the payment, petitioner was required to have been (1) insured under multiple (two o r ,!13 We found the taxpayer's position on brief unclear as' between the two subsections, but the Commissioner's arguments assumed that the taxpayer was claiming an exclusion under sec . 104'(a)~~(3 ) . .141n this regard, we stated :

section 104(a)(3) provides an exclusion from gross income of "amounts received through accident or health insurance for personal injuries or sicknes s (Emphasis added .) The mere fact that, amounts in question-are paid by an insurance company under an insurance policy does not establish that such amounts were actually paid for injuries or sickness .' [ Marsh v . Commissioner , supra .]

more) insurance policies plrchased from State Farm with UM/UI M coverage, (2) injured through the fault of an uninsured o r underinsured motorist, and (3) denied payment under one of th e foregoing policies while receiving payment under another .

We are satisfied that these prerequisites establish that petitioner received the settlement payment "through" accident insurance, or under such a policy, within the meaning of sectio n 104(a)(3) and the regulati ns . Petitioner's claim against Stat e Farm in the class action l'wsuit waslat its core a demand for .,.,, ' payment under the second of the two ~olicies purchased by heran her husband with respect to which~Stlte Farm had denied-coverag e That petitioner had to litigate to e tablish her rights to .

1 ~ ' I payment under the second policy does not change the conclusio n that the payment was recei-~ed "through" accident insurance . I t is apparent that a .primary issue in the litigation was the prop e interpretation of the contractual terms of petitioner's policies .

Certain members of the plaintiff class, the "Identifie d Plaintiffs", were excluded from any payment under the settlemen t agreement because the anti stacking provisions in their policie s had been found sufficient to support State Farm's denial o f coverage . In these circumstances w e are persuaded that Statei'i Farm settled with petitioner because the company believed ther e was a significant likelihoood its denial of coverage under th e second policy would be found impropei . We accordingly conclude 18 - that, but for her status as an insured under the second policy , petitioner would not have received the settlement payment .

therefore hold that the settlement payment was received `through " accident or health insurance .

4 .

Whether the Payment Was Received "for" Personal Injuries or Sicknes s Petitioner was a member of a plaintiff class whose member s had sustained personal injury as the result of the fault'of a n uninsured or underinsured motorist but had been denied coverag e 1e under one or more of their State Farm policies with UM/UIM coverage . Petitioner's eligibility to receive the payment a t issue required, in addition to the foregoing, that she also not have been classified as a "Fully Compensated Plaintiff" ;' namely, a member of the plaintiff class whom the superior court had ruled had been fully compensated for his or her injuries .15 Only b y meeting the foregoing requirements did petitioner become qualified to receive a pro rata distribution of the $29,,873,750 settlement funds .

On the basis of these terms of the settlement agreement, w e are satisfied that petitioner received her share of . th e settlement funds in significant part because .she ha d 15In order to qualify-as an "Eligible Class MemberIC, petitioner also must not have been classified as a ."Sev :enth Year Class Member" ; namely, a plaintiff class member whose claims under ,a State Farm policy had been the subject of an unsuccessful State 'Farm motion for summary judgment on the basis of :the statute of limitations .

uncompensated personal injuries for which she had made°a bona'' fide claim against her insurer for indemnification ; which was settled .

Respondent argues, ho v'ever, that the class action .lawsui t involved a multitude of claims beyond those premised on personal injury (e .g ., breach of contract,"`br~ach of covenant of good faith and fair dealing, fraud ,. violation of the Arizona Consumer Fraud Act, breach of fiduciary duty, and racketeering) and~soug h compensatory damages, tre b I e damages ; punitive damages, ands' prejudgment interest'. 16 Since the settlement agreement did . not expressly allocate any portion ofithe payment to personal injur y and petitioner became subject to a .-general-release of all claim s against State Farm, it cannot be said, respondent argues, that } petitioner received the pa ent "for"I personal injury ."' Rather ; I the argument goes, the paythent was made in .exchange for releas e of all claims against State Farm,'and petitioner has failed :t o prove that any portion is attributable to personal injur y 16Although respondent ' s argument was directed at sec .

104(a )( 2), we consider it to the extent it may apply to petitioner's entitlement to an exclusion under sec . 104(a)(3 .)

"Respondent also relies on Tag_a' v . United States , 35 F .3d 93 (2d Cir . 1994 ), and Morabito V . Commissioner , T .C . Memo . ' 1997- 315, but this reliance is misplaced . In both cases the taxpay er ; had never advanced a claim of any ` kind before receiving payment . Petitioner formally sued'State Farm land the litigation was' - settled pursuant to a written settlement agreement . Morabito offer no guidance in this context .

Taggi and 'I .

2 0 - is Wei :disagree . . While the general release may have .

extinguished all of` petitioner's claims in the lawsuit, we find more persuasive the fact that petitioner's eligibility for a share,pf the settlement funds depended upon her showing that she had not'been fully compensated for her injuries . Petitioner',s injuries were extensive . She testified credibly that she was ou t work for a year and that she anticipated medical expenses i n future years as a consequence of her injuries when she settled her claim under the first State Farm policy in 1996 . in these circumstances we are persuaded that State Farm's payment to her, up to the $50,000 limit on UM/UIM coverage . in her policy, wa s "for" ;,personal injuries within the .-meaning of section 104(a)(3) .

,That leaves the excess of the settlement payment over the $50,000,coverage limit of the second policy ;ii .e ., $2,896 .- This amount'could not have been indemnification under the policy "for" petitioner's personal injuries because State Farm's obligatio n under the policy did not extend that far . Rather, we are - persuaded that $2,896 of the settlement payment was forlsomething else, either interest¹⁸ or resolution of any claims tha t "Petitioner has conceded that $302 of the'$52,896"payment is taxable interest . That concession is consistent with the undisputed facts . State Farm initially deposited $29,873,750 into trust to be distributed pro rata to the 568 Eligible Class . Members . Petitioner's share of the original deposit would have been :-$52,595 . Petitioner's distribution was approximately $301 more than that .

,j; f petitioner was entitled t o recover damages on account of :Sta t e (cid:127)r Farm's wrongful denial of coverage .

Consequently, we conc ude that :petitioner has shown tha t $50,000'of the payment at issue is excludable from gross incom e pursuant to section 104(a) 3) ands had ,failed to show any bas i for excluding the remainder .

Social Security Payment s We now consider whether petitioner must include in her 200 2 gross income the $9,396 of payments the received from the Socia l Security Administration, as respondent determined .

Petitioner's unchallenged testimony was that she wa s disabled in 2002 as a result of reflex dystrophy syndrome an d received the payments from the Social Security Administration~'~a t issue as a result of that disability .

We accordingly find that the payments were Social Security disability insurance benefits .

; Section 86 requires the inclusion in gross income of up to 85 percent of Social Security benefits . received during the ; taxable year, including Social Security disability insurance,,,, benefits .

See sec . 86 ( a),I(d) ;19 see also Reimels v ..

Commissioner , . 123 T .C . 245, 247 (2004) , affd' . 436 F .3d 344 (.2d!!

Cir . 2006) ; Joseph v . Commissioner', TI .C . Memo ." 2003-19 ; Thomas' v .

Commissioner , T .C . Memo . 2 0 01-120 . . Gienerally, under'sectio n 19Sec . 86(d)(1)(A) defines Social Security benefits t o % nclude amounts received under tit . II of the Social Security i Act, 42 U .S .C . secs . 401-434 (2000), as amended, which include Social Security disability[insurance,benefits .

Id . sec . 423 .

2 86(a)°~((cid:127)1) Social Security benefits are includible in gross incom e "in an amount equal to the lesser of--(A) one-half of the social security benefits received during the taxable year, or (B) one- half!-of ;the excess described in subsection (b)(1) ." The excess described, in subsection (b) .(1) is the sum of the taxpayer' s modified adjusted gross income (MAGI) and one-half of the Socia l Security benefits received during the taxable year, over the taxpayer's "base amount" . If . the-sum of the MAGI and on'e-half of the Social Security benefits received exceed the taxpayer' s "adjusted base amount", then the amount of Social Security benefits includible in gross income is equal to the lesser of :

(A) the sum of-- 85, percent of such excess, . plu s (i) (ii) the lesser of the amount determined under paragraph (1) oran amount equal to one-half of the difference between the adjusted base amount and the base amount of the taxpayer, or (B) 85 percent of the social security benefits receive d during the taxable year . [Sec . 86(a)(2) .

] For purposes of section 86, a taxpayer's MAGI is her .

"adjusted gross income--(A) determined without regard to this .section and sections 135, 137, 221, 222, 911, 931, and 933, and (B) increased by the amount of interest received or accrued b y 'the taxpayer during the taxable year which is exempt from tax .

Sec . ,86 (b) (2) . Section 86(c) (1) (C) defines the term "base amount to mean "zero in the case of a taxpayer who--(i) is }married~as of the close of the taxable year (within the'imeaning of section 7703) but does not file a joint return for such year , and (ii) does not live apai t from' his spouse at all times durin g the taxable year ." Section 86(c)(2) (C) defines the ter m "adjusted base amount-to mean "zero in the case of a taxpayer described in paragraph (1) (C) . " " i Respondent determined that petitioner ' s "sole item of gro s s income for 2002 othe r than her disability insurance benefits o f $9,396 was the $52,896 payment from State Farm . We have .° redetermined that only $2, 96 of the State Farm payment i s includible in petitioner's 2002 gross income . As a consequence , none'of the adjustments in section 8 E (b)(2) applies ; petitioner's gross income, "adjusted gross income ' 20 and MAGI in 2002 -were 1 t h same--$2,896 . Petitioner's "base amount" and "adjusted base amount" were both zero .21 See sec' . 8(c) (1) (C) , (2) (C) .

20Petitioner has not shown that she :is entitled to-any of. the deductions under sec . 62 that wold cause "adjusted gross.,1 income" to be less than "gross income" .

21Petitioner's base amount was zero because she was a taxpayer described in sec . 86(c)(1)(C) . Petitioner was married at the end of 2002, has not shown she satisfied the requirements of sec . 7703(b) to . be trealted as !not married in 2002, and didno file a joint return for the year . See sec . 86(c) (1) (C) (i) . ; see also Phillips v . Commissioner , 86 T .k . . 433, 441 n .7 (1986) ., ,-affd in part and revd . in part ion another issue 851 F .2d 1492 (D .CC . Cir . 1988) ; Brunner v . Commissioner , T .C . Memo . 2004-187 (joint filing status not allowable unless a joint return is filed and made a part of the record before the case is submitted to the ITa Court for decision), affd . per curia 142 Fed . Appx . 53 (3d Cir : 2005) . Further, petitioner has not shown that she lived apar t I (continued .

.

lUnder section 86(b)(1), petitioner's MAGI ($2,896) plus one- half`,of the Social Security disability insurance benefits o f $9,396 ($4,698) equals $7,594, which exceeds her "adjusted bas e amount'",of zero . Accordingly, under section 86(a)(2) the amount of Social Security benefits includible in petitioner's gros s income is equal to the lesser of $6,455 (85 percent of the exces s ' $7, 594 . ($6,455) plus zero²²) , or $7,987 (85 . percent of th e Social Security benefits received) .

"Accordingly, petitioner must include in her gross income for 2002 ;,$61;455 of the $9,396 of Social Security disability insurance benefits she received during the year, pursuant to section 86 .

II Filing Requirement , We have redetermined that petitioner had gross income in .2002 totaling $9,351 (consisting of the $2,896 taxable portion of the State Farm payment and the $6,455 taxable portion of the Social Security benefits) . As a consequence, the Court will consider sua .sponte whether petitioner had an obligation to fil e a Federal income tax return for 2002 .

continued) from her former spouse "at all times" during 2002 . see' sec . 86 (c),(1) (C) (ii) . Petitioner's adjusted base amount was also zero 'becau'se she is a taxpayer described in sec . 86(c)(1)(C) . See sec .. 86 (c) (2) (C ) ~t 22One-half of the difference between the adjusted base 'amount!',(zero) and the base amount (zero) is zero, which is less than the amount determined under par .(1) . See sec . . 86 (a)'(,2) (A) (ii) .

Section 6012(a)(1) re quires the filing of an income tax return by every individual having . grbss i ncome for .the taxab l e year which equals or exceeds the "exemption amount" (i . e . , $3,00023) with four exceptions . Petitioner does . not satisfy .,the .- first three exceptions (i .e ., clause s .(i), (ii) and (iii) . of ° i section 6012(a) (1) (A) , which apply to unmarried individuals .; (unmarried) heads of households, and surviving spouses , respectively) because she was married as of the close of ..2002 !

Petitioner also fails to satisfy the fourth exception in claus e (iv) of section 6012(a)(1) (A), which applies to an individua l (iv) who is entitled -to ;. make a joint return and whose gross income, when combined with'the gross income of his spouse, is, for the taxable year, less than the, ., sum of twice the exemption amount plus the basic standard deduction applicable to a joint return, but only if such individual and his spouse, at the close of'' ; the taxable year, had the same household as their home .

Petitioner fails to satisfy . the exception in clause (iv) in .thre respects . First, she is not entitled to file a joint return, since she had not filed suih a return (or any return) as of the submission of this case for decisio n See Phillips v .

Commissioner , 86 T .C . 433, 441 n . 7 986), affd . in part and revd . in part on another issue 851 F 2d 1492 (D .C . Cir . .1988 ) 23For purposes of sec .l 6012,a taxpayer's "exemption amount" has the same meaning as provided in sec . 151(d) . Sec . 6012 (a) (1) (D) (ii) . Sec . 151 (d) provides that generally a taxpayer's "exemption amount" is$2,'000 increased by a cost-o :f- living adjustment . Sec . 151(d)(1), beginning in 2002 the "exemption ;amolnt" under sec . 151(d), f adjusted for the cost of living was $3,000 . See Rev . Proc . 2001 59, sec . 3 .11, 2001-2 C .B . 623, 626 .'I (4) . For taxable years Brunner v . Commissioner , T .C . Memo . 2004-187, affd . per curiam 142 Fed . Appx . 53 (3d Cir . 2005) . Second, petitioner has provided no evidence concerning her spouse's gross income in 2002 : . Third, petitioner has not shown that she and her spous e had the-same household as their home at the close of 2002 . Th e available evidence suggests the contrary ; namely, petitioner testified that in 2002 her marriage was "dissolving" and~that sh e and herilhusband " weren 't really talking too much" .

Because petitioner did not satisfy any of the exceptions, she was required to file an income tax return under section 6012,(a)(1) i n that~her gross income of $9,351 exceeded $3,000 .

III . Dependency Exemption Deductio n We next consider whether petitioner is entitled to,a a dependency exemption deduction for 2002 . Petitioner contends that ;she is entitled to a dependency exemption deduction for one Ik of her :children, while respondent's position is that she ha s failed to show entitlement because there is no evidence of the child's whereabouts or source of support during 2002 . We agre e with respondent .

Section 151(a) and (c) allows a,taxpayer a deduction for each individual who is a dependent of the taxpayer as defined in section 152, including a child of the taxpayer who has no t .reached age 19 by the close of the taxable year . The allowance is conditional, however, on the taxpayer's'including the 237 , identifying number of the dependent on the return claiming the exemption .

See secs . 151(p), 7701(a)(41), 6109 . Section 152 (a ) defines a dependent in pe r inent part to include a son of th e taxpayer over half .of whose support for the year was received from the taxpayer or is treated as received from the taxpaye r under subsection ( c) or (e) of section 152 .

Section 152(e) -providbs specia l rules for treating one + taxpayer as if he or she provided'moie than half the support of his or her child in the case of divorced parents, which for thi s purpose includes married i dividuals who,'notwithstanding the ; absence of a divorce, legal separation, or written separation I i agreement, nonetheless "live apart a all times during the last 6 .months of the calendar yea]" . See . 152(e)(1) . Application of , section 152 ( e) also requires that'the child receive over half i 'of his support during the calendar-from his parents and .be in th e custody of one or both of them for more than one-half of the calendar year .

Id .

If these conditions are met, the child i s treated as receiving-over alf of , his support from the . parent l having custody for a greater portion of the - calendar year,~ ida , or from the parent having custody for the lesser .portion if th e other parent releases his dr her clailm'in a written declaratio n attached by the claiming parent to his or her return ; sec .

152 (e) (2) .

28 - I~Petitioner has failed to show that she satisfies any of the section`;152 requirements for claiming either of her children as dependents . She has proven only that during her marriage she ha d two children who were minors during 2002 . Beyond that, there is no evidence of the source of .the children's support in 2002 or o f which parent had custody over what period during that year .

Petitioner asserts on brief that she provided over half ;of the support, of one of her two children . However, statements on brie f are not evidence . See Rule 143(b) ; Neonatology Associates, P .A .

v . Commissioner , 115 T .C . 43, 92 (2000), affd . 299 F .3d,221 (3 d Cir . 2002) .

iPetitioner testified that she and her husband had an oral agreement covering 2002 under .which petitioner was entitled to c'Flaim°one of their children as a dependent . However, even a formal written agreement, incorporated in a State : court .Jdecree,- granting the dependency exemption deduction for a child to on e p'arentis ineffective if the requirements of section,152 are .not met . See 'Miller v . Commissioner , 114 T .C . 184, 193-194'(2000) .

It follows that any oral understanding between petitioner and he r husband is likewise ineffective .

(: .Given that the record does not establish the children' s whereabouts in 2002, petitioner has failed to show either that ,she provided over half of the support of either child, as required under section 152(a), or that she should be treated as providing over half of that support nder section 152(e) becaus e she had custody of the child for the greater portion of 2002 or had a written declaration from her husband releasing any claim t one of the dependency exemption deductions for their two children .24 Respondent's determination that petitioner,i s entitled to only one-persoal exemption is therefore sustained .

I IV .

Child Tax Credi t We turn to petitioner s claim of a child tax credit fo r 2002 .

Subject to income limitations not pertinent here, a tax credit is allowed with respect t c each "qualifying child" :

f ;, the taxpayer . Sec . 24(a) and (b) Section 24 (c)(1) generally defines a "qualifying child" as a . child of the taxpayer for whom the taxpayer is allowed a dependency exemption deduction unde ?

section 151 and who has not attained age 17 . . Since we have :, concluded that petitioner is nottenti tied to a dependenc y exemption deduction for either TJM o r TDM, neither child is petitioner's "qualifying child" under section 24(c ) Consequently, petitioner is not ertit led to a child . tax credit ; and we sustain respondent's determina tion to that effect .

th V .

Additions to Ta x 30 - ;:Finally, we consider whether petitioner is liable fo r additions to tax under section 6651(a)(1) and (2) .

Respondent bears the burden of production with respect to petitioner's liability for the additions to tax . See sec .

7491,(c) . . In order to meet that burden, respondent must offer sufficient evidence to indicate that it is appropriate to impose the additions . See Higbee v . Commissioner , 116 T .C . 438, 446 (2001) .' Once respondent meets his burden of production , petitioner bears the burden of proving error in the determination, including establishing reasonable cause or othe r ;'exculpatory factors .

Id . at 446-447 .

Section 6651(a)(1) Addition to Ta x Section 6651(a)(1) imposes an addition to tax for any "failure to file a return by its due date . The addition is equa l 5 percent-of the amount required to be shown as tax on th e return for each month or portion thereof that the return is late, up to a maximum of 25 percent .

See id .

The addition will not "apply if it is shown that the failure to-file a timely return wa s „due to reasonable cause and not due to willful neglect .;, See id . ; see also United States v . Boyle , 469 U .S . 241, 245 (1985) .

A failure to file timely is due to reasonable cause "If th e taxpayer exercised ordinary business care and prudence and was I I nevertheless unable to file the return within the prescribed time" . Sec . 301 .6651-1(c) (1), Pr, oce!d . & Admin . Regs .

; see Unit e States v . Boyle , supra at 1246 . Wil l ful neglect is interpreted a a "conscious, intentional ailurei` or reckless indifference . " United States v . Boyle , supra at 245 .

As previously discussed, we hav sustained respondent' s i determination that petitioner had gross income in 2002 to th e extent of $9,351, which exceeded her. exemption amount . She wa s therefore required to file a .return for 2002 ..

See sec .

6012(a)(1) . Petitioner's return for 2002 . was due on April 15 1 2003, in the absence of any extensions . See secs . 6072(a) ; 6081(a) . The parties stip lated that petitioner did not fil e a return for 2002 . The foregoing sati fies respondent's burden o f production under section 7491(c) and establishes petitioner's liability for the section i651(a)(1) addition to tax unless petitioner can establish reasonable cause for her failure to,fil e timely . See Higbee v : Commissioner ; supra at 446 :

Petitioner has not made an expl'cit .claim that she ha d reasonable cause for her failure to file . She testified, .

' however, that she consulted an accountant regarding the proper tax .treatmerit of the payment she received from State Farm and!,' that he advised her that it might or might not be taxable and that she should make further inquiry . Assuming this testimony should be treated as a claim of reasonable cause, it falls short .

I While it is true that the receipt of professional advice to the II 32 - effect', that the taxpayer does not have a tax liability or filin g obligation may constitute reasonable cause for a failure . t o timely file, see, e .g ., United States v . Boyle , supra at 250=251 &in .9 ; Zabolotny v . Commissioner, 97 T .C . .385, 400-401 (11991), affd . in part and revd . in part on other grounds 7 F .3d1774 (8t h Cir . .1993), petitioner received .no such advice regarding. her._ obligations with respect to the State Farm payment .and no advic e whatsoever regarding the Social Security payments . . We accordingly conclude that petitioner did not have reasonable .

cause for her failure to file, and we sustain respondent's determination of the addition to tax under section 6651(a)(1) , ;,with„ the "amount required to be shown as tax on * * *, :[the] ' return computed in a manner consistent with petitioner ' s gros s income as redetermined herein .

Section 6651(a)(2) Addition to Ta x Section 6651(a)(2) imposes an addition to tax for any failure to pay the tax shown-on a return on or before the date prescribed for payment of such tax . The addition is .equal to 0 .5 percent of the amount shown,as tax on the return for each month, or fraction thereof, during which the failure to pay continues , ,up tofa maximum of 25 percent .25 See id .

The date prescribed fo r y.,2The sec . 6651(a) (1) addition to tax „is reduced by the amount of the sec . 6651(a)(2) addition for any month (or fraction thereof) to which an addition to tax applies under sec '6651(a)(1) and (2) . See sec . 6651(c)(1) .

., payment of income taxis the due date for filing the return determined without regard Io any extinsion .of time for fili n See id .

The addition applies only when an amount of tax is,shown on a return . See Wheeler v . Commissioner , 127 T .C . 200, 208 (2006) Cabirac v . Commissioner , 120 T .C . 163, 170 (2003) . A substitute for return (SFR) made by the Secretary under section 6020(b) is ° treated as "the return filed by the taxpayer for purposes of 'I I .

determining . the amount of the addition" under section 6651(a)(2)"i .

i Sec . 6651(g)(2) . For these purposes, an SFR "must be subscribed , it must contain sufficient information from which to compute the l taxpayer's tax liability, and the return form and any attachment s must purport to be a `return' .

Spu lock v . Commissioner , T .C .

Memo . 2003-124 ; see also C birac v . . Commissioner , supra at ' 170-171 .

. j The addition will not apply if it is shown that the failur e to pay timely was due to reasonable cause and not due to willful` neglect .

See sec . 6651(a)((2) . A 'failure to pay is due to reasonable cause if the taxpayer `jexercised ordinary busines s care and prudence in providing for payment of his tax liability and was nevertheless either unable ti pay the tax or would suffer an undue hardship * * * if he paid on the due date ." Sec .

301 .6651-1(c)(1), Proced . & Admin . Re,gs . ; see Merriam v .

1k Commissioner , T .C . Memo . 1995-432, affd . without publishe d opinion,107 F .3d 877 (9th_Cir . 1997) .

As noted, petitioner did not file a return for 2002 , Respondent, pursuant to section 6020(b), prepared an SFR!for 2002 sAowing'tax due of $16,822 .26 The SFR qualifies as a valid return for, purposes of section 6651(a)(2) . Petitioner failed to pa y timely, her 2002 .tax liability as shown on the SFR . These undisputed facts satisfy respondent's burden of production unde r section 7491(c) and establish petitioner's liability for the section6651(a)(2) addition to tax unless petitioner can establish reasonable cause for her failure to pay timely . See Higbee v . Commissioner , 116 T .C . at 446 .

Petitioner was disabled during 2002 and 2003 . Althoug h petitioner testified at trial that she received Social Security disability insurance benefits in 2002, there is no other evidence of, her ; financial circumstances at that time . On this record, we are unable to conclude that petitioner was unable to pay her tax due or 'that she would have suffered undue hardship if she had paid the tax on its due date . See Guterman v . Commissioner , T .C .

'Memo . 2008-283 ; Bray v . Commissioner , T .C . Memo . 2008-113 ; see also se'c . 301 .6651-1(c)(1), Proced . & Admin . Regs .

26The tax was calculated on the basis of the same adjustments subsequently determined in the notice of deficiency .

We therefore hold tha petitioner has not shown reasonabl e cause with respect to the section'66 1 (a) (2) addition to tax, h a n I we sustain respondent's dekermination of the section 6651(a)(2) addition to tax for 2002, educed in accordance with section 6651(c)(2) to reflect our redetermination of petitioner's gross income for 2002 .

To reflect the foregoing, Decision will be entere d under Rule 155 .

E

24. The exceptions in sec . 152(e)(3) and (4) also do not apply . There is no evidence that there was a multiple support agreement as defined in sec . 152(c) covering petitioner's children in 2002,,and there was no pre-1985 instrument within meaning of sec . 152(e)(4) applicable Ito them .