Hartford & Josephine Shelton, Petitioner
T.C.
Opinion
'T .C . Memo . 2009-11 6 UNITED STATES TAX COURT HARTFORD AND JOSEPHINE SHELTON Petitioners v .
COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No . 16278-07 . fled May 26, 2009 .
Hartford and Josephine Shelton, pr se .
Rebecca Dance Harris , for respondent .
MEMORANDUM . FINDINGS OF FACT AND OPINIO N GOEKE, Judge : Respondent determin d a .deficiency of $46,395 in petitioners' Federal income tax and an accuracy-related penalty of $9,279 under section 6662 fo 2004 .1 The issues fo r decision are : (1) Whether pursuant t o 'Unless otherwise indicated, all se the Internal Revenue Code .
petitioners may-exclude from their gross income the settlement proceeds received by petitioner wife .' We hold that the settlement award is gross income and not excludable ; and (2 ) whether petitioners are liable for an' : accuracy-related penalt y under section 6662 for their failure .to report the settlement proceed's . We hold that they are not .
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FINDINGS OF FAC T Some of the facts have been stipulated and are so found .
The stipulation of facts and the attached exhibits ar e ncororated herein by this reference . At the time they file d ¢( ~~ ,ICI - a h = 14 ( , i their ',petition, : petitioners resided in Virginia .
Petitioner wife was hired by the Dial Corp . (Dial) at some , aN ~iitimeLbefore 1999 . Petitioner husband'is disabled and unable to -'work':'.I;While employed at Dial petitioner wife was subject t o Lexual hharassment by her supervisor . ,j 'Petitioner wife's, , ii I supervisor repeatedly harassed her, made references to petitioner husband's disability, and refused to stop after petitioner wife .
rebuffed his advances . Petitioner wife complained about th e harassment to Dial's management, but!no corrective action was taken„and petitioner wife's employer retaliated against her . As a result of her complaints, petitioner wife was routinely assigned to menial labor or given the`'least desirabl e .
;g(cid:127) a assignments .
Although petitioner wife was"subjelt to harassment by her immediate supervisor, she was also'hara sed by other members of Dial's management . Petitioner wife developed severe emotional problems and began to receive medical help . Petitioner wife began and continues to take antidepress .nts and other medication to deal with the physical effects of he~-harassment .
On May 20,' 1999, the Equal Employm nt Opportunity Commission (EEOC) filed a complaint against Dial in the U .S . District Court for the Northern District of 'Illinois . The complaint alleged that Dial had engaged in a pattern and practice of discrimination against a class of female employees .bas d upon their sex by :
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subjecting them to a hostile and abusive work environment and that Dial failed to remedy this situati n after the company had become aware of the alleged harassment .
On April 29, 2003, the EEOC and Dial entered into a consen t decree . The consent decree provided in pertinent part that Dia l would pay $10 million (the settlement p oceeds) to be distributed to all eligible class members . The decree also provided for corrective action on Dial's part to prevent future instances o f sexual harassment . Petitioner wife was a member of the class of workers eligible for a portion of the s E ttlement proceeds .
In order to receive the settlement proceeds, an eligibl e claimant had to sign a release form discharging Dial from liability for all past instances of sex I ~' al harassment . Th e release provided in pertinent part that the settlement proceed s were for emotional pain, suffering, inconvenience, mental .
anguish, loss of enjoyment of life, and nonpecuniary losses . Th e release did not provide any information concerning the proper treatment of the settlement funds fors Federal tax purposes .
However, a claimant who signed the release acknowledged that th e settlement amount might be subject, in whole or in part, t Federal and State income taxation . Petitioner wife signed a release and received $123,500 from Dial in 2004 . Dial issued a Form 1099-MISC, Miscellaneous Income, to petitioner wif e .1 "reporting income of $123,500 .
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h Petitioner wife contacted the Internal Revenue Service (IRS ) at some .po.int .after receiving the settlement proceeds to determine their proper treatment . The IRS representative informed petitioner wife that in somejsituations settlement proceeds could be excluded from income if they were paid on accountlof physical injury . Petitioner wife, having suffere d physically as a result of her supervisor's harassment , believed that ;; the settlement proceeds were paid to compensate her fo r ,those injuries .
On October 14, 2005, petitioners fileda joint Form 1040, Ip U .S . Individual Income Tax . Return, for tax year 2004 .
'Petitioners" Form 1040 was prepared by a ,paid return preparer .
II Petitioner wife informed the return preparer that the-settlemen t proceeds were paid to compensate her fo physical injury . I n accordance with petitioner wife's repre entations, the return preparer did not include the settlement proceeds on petitioners ' return .
On April 23, 2007, respondent issu d a notice of deficienc y (the notice ) to petitioners for 2004 . 1espondent determined in the notice that petitioners were required to include the settlement proceeds in gross income and that petitioners were '' liable for a section 6662 accuracy - related penalty . On July 18, 2007, petitioners timely petitioned this Court for a redetermination of their tax liability .
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OPINION
Gross income generally includes all income from whatever source derived .
Sec . 61 (a) . The definition of gross income-i s broad in scope, while exclusions from income are narrowly construed .
Commissioner it . Schleier , 5 5 U .S . 323, 328 (1995) .
Damages (other than punitive) received n account of personal physical injuries or physical sickness ay generally be excluded from gross income . Sec . 104(a)(2) . Fo the damages to be excluded under this provision, the unde lying 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 , su ra at 337 . Emotiona l distress is not treated as a personal p aysical .injury or physical sickness except .for damages not in excess of the amount paid-for medical'lcare attributable to emotional distress . Sec . 104(a ) (f lush language) J j Petitioners focus on the severity of the harassment ;; and the physical ailments'that it caused ..in arguing,that they are not required to include the settlement proceeds in gross income . ,~ INry Petitioner wife contends that the settptlement(cid:127)proceeds should no t it ~~ f be taxable because after 'being harassed she was not the same w, person ~physically . Petitionerwife points,to the fact .that she sought medical help and continues tolltake medication to deal with the physical effects of the harassment . Respondent does!~,.not argue that the underlying cause of action in this case is not a IF ; tort or ,jtort- type right ; instead, respondent argues thatIrthe E damageslppetitioner wife received were not on account of personal physical injuries or physical sickness .
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Although petitioners 'argue that ;, petitioner wife suffere d physical injury-as a result of her sexual harassment, .that injur y does .,,not meet the requirements of . section 104 . Petitioner wife, l is J although she suffered physically, . was li not compensated for that physical injury . . Petitioners do not claim that-any-portion o f the settlement proceeds were to reimblurse them for amounts paid for medical care attributable to emotdonal_distress .
See sec . .
104 (a) d( ( flush language) ;, Sanford v . Commissioner , T .C . Memo .
5 8 L iiP suffering, inconvenience, mental anguis loss of enjoyment of i life, and nonpecuniary losses, not physical .injury . Damages ' received on account of emotional stress, even when resultan t physical symptoms occur, are not excludable from income under, section 104(a)(2) .
Hawkins v . Commissiner , T .C . Memo . 2005-149 .
Because petitioner wife did not receive the settlement proceed s on account of personal physical injury or sickness, petitioner s must include those amounts in gross inc me . See Sanford v .
Commissioner , supra ; Shaltz v . Commissi'ner, T .C . Memo . 2003-173 Accuracy-Related Penalt y Respondent determined that petitioners are liable for an accuracy-related penalty under section 662 for negligence or disregard of rules or regulations . Section 6662(a) and (b)(1) .
imposes a 20-percent penalty on an unde payment of tax that results from negligence or disregard of rules or regulations .
Section 6662(c) defines the term "negli ence" to include "any failure to make a reasonable attempt to comply with the provisions of this title", .and the term "disregard" to include "any careless, reckless, or intentional disregard . " The section 6662 penalty is inapplicable to the extent the taxpayer had reasonable cause for the underpayment and acted in good faith . Sec . 6664(c)(1) . The determination of whether th e taxpayer acted with reasonable cause and in good faith is made on a case -by-case basis, taking into account the relevant facts and circumstances .- Sec . 1 .6664-4(b)(1), 'Income Tax Regs .
;`.Circumstances that . may indicate reasonable cause and good faith include an honest misunderstanding of . fact or law that is reasonable in light of all of the facts and circumstances , including the experience, knowledge „and education of th e taxpayer ."
Id .
Generally, the most,important factor is the extent ?gi,of the taxpayer'-s efforts .to assess the proper ta x II ..
liability .
Id .
An honest misunderstanding of fact or,law tha t is reasonable in the light of the experience, knowledge,and education of the taxpayer may indicate reasonable cause and goo d faith :1111~' Remy v . Commissioner , T .C . Memo . 1997-72 .
petitioners have no experience or education in tax law and sought'~advice from the IRS in order to determine the proper treatment of the settlement proceeds, The IRS employee informe d petitioner wife that in some circumstances settlement proceed s couldl'be excluded if they were paid to compensate for physical injuries . Petitioner wife believed,that the proceeds were pai d to compensate her for physical injury . This belief was reasonable ; as a result of the harassment petitioner . wife did no t feel tiiat s.he was the same physically . Petitioner wife s belief pis supported by the fact that petitioner wife required medical phelp and began taking numerous medications soon after th e harassment began . We find petitioners' mistaken,belief that the ;li p ,settlement proceeds were for physical injury to be reasonable .
Petitioners acted reasonably and in goo faith when they informed their return preparer that the settleme t proceeds were paid o n account of physical injury . See Stadny v . . Commissioner , T .C .
Memo . 2008-289 ; Pettit v . Commissioner , T .C . Memo . 2008-87 ; Gibson v . Commissioner , T .C . Memo . 2007 224 . Viewing all of the circumstances, including the experience knowledge, and education of petitioners, we conclude that petiti ners have demonstrated reasonable cause for failing to report he settlement proceeds a s income and that they acted in good fait Accordingly, petitioners are not liable for the accu acy-related penalty .
To reflect the foregoing, Decision will be entered for respondent as to the deficiency and for petitioners as t the accuracy-related ena t '.