Michael Thomas & Lori Lynn Prasil, Petitioner

SERTICE STAT.

T.C. Memo. 2003-100 . UNITED STATES TAX COURT MICHAEL THOMAS PRASIL AND LORI LYNN PRASIL, Petitioners 1. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 3945-02.

Filed April 9, 2003.

Michael Thomas Prasil and Lori Lynn Prasil, pro sese.

Doualas R. Fortney, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

ARMEN, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b) (3)¹ and Rules 180, 181, and 182 of the Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency in petitioners' ¹ Unless otherwise indicated, all subsequent section re erences are to the Internal Revenue Code in effect th taxable year in issue.

for 1999,

SERVED .APR

9 2003 report taxable nonemployee compensation of $7, 650, which was reported by Heartland on Form 1099.

OPINION6

Petitioners. do not dispute receiving the $7, 650 settlement payment from Heartland in 1999 to settle Mrs. Prasil's sex discrimination claim against Heartland. Petitioners contend, however, that the $7, 650 settlement payment is not taxable because it "was the amount exempted in our bankruptcy for my ).

discrimination lawsul ·t" .

In the alternative, petitioners contend that respondent failed to file a proof of claim in their bankruptcy proceeding. Petitioners' contentions are misplaced.

The issue presented in the present case concerns an action for redetermination of a deficiency for the taxable year 1999, which is a postbankruptcy Federal tax liability, and not the sec 7491 does. not apply in this case to shift the burden sec with the requirements of sec. 7491(a) (2) .

1 was appl cable nor es ab i hed that they 11y complied Sec. 451(a) requires- e taxab e year of receipt unless the taxpayer' s gross income inod wÄdd Properly assign the income to taxpayer' s accounting me a different taxable Perio . received in settlements of cash basis taxpayers, payments ts are included in income in the lawsul e ear in which the payments are receive un . 451(a) . Oates v. Commissioner, .

F 2d 711 (7th Cir. 1953) ; Amend v.

Sec.

excludable. 584-585 (1952) affd. 178 Commissioner, . Income Tax Regs. 1.451-1(a), are cash basis taxpayers w o 1999.

Thus, .

the issue concerns p .85 (1949); secs. 1.446-1(c) (1) (i), In the present case, petitioners in eceived a settlement payment ehtioners' taxable year 1999.

collection of a prebankruptcy Federal tax liability.⁸ Therefore, the issue before us is a question of petitioners' Federal income tax liability under the Internal Revenue Code, Title 26, United States Code, and not a question under the Bankruptcy Code, Title 11, U.S. Code.

Respondent argues that the $7,650 settlement payment is includable in petitioners' gross income for 1999.

For the reasons stated below, we agree.

.

Section 61(a) provides that "gross income means all income frcm whatever source derived" except as otherwise provided.

The definition of gross income is broad in scope, Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955), and exclusions from gross income are narrowly construed, United States v. Burke, 504 U.S. 229, 248 (1992) (Souter, J., concurring in judgment); Commissioner v. Jacobson, 336 U.S. 28, 49 (1949).

As relevant to the present case, section 104(a)(2) excludes from gross income "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 See Swanson v. Commissioner, 65 T.C. 1180, 1184 (1976), . where this Court observed that an action brought for redetermination of a deficiency "has nothing to do with collection of collection of a debt".

the tax nor any similarity to an action for physical injuries or physical sickness".9 The term "damages received" means an amount received "through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such .

prosecution." Sec. 1.104-1(c), Income Tax Regs. Section 104(a) further provides that "emotional distress shall not be treated as a physical injury or physical sickness" for purposes of section 104(a)(2) (except for damages not in excess of .the amount paid for medical care attributable to emotional distress). According to the legislative history of section 104(a)(2), "[T]he term emotional distress includes symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress."

H. Conf. Rept. 104-737, at 301 n.⁵⁶ (1996), 1996-3 C.B. 741, 1041 n.56.

Generally, damages are excludable from gross income if they satisfy two requirements.¹° The Supreme Court in Commissioner v.

The Small Business Job Protection Act of 1996, Pub. L.

to narrow the exclusion for personal 104-188, sec. 1605, 110 Stat. 1838 (1996 amendment), amended sec. 104(a)(2) received pursuant amounts received after Aug. 20, 1996. Under personal injury or sickness must be physical Moreover, the exclusion provided by sec. 104(a)(2).

the amendment explicitly excepts punitive damages from to a judgment or settlement, effective for the 1996 amendment, in nature.

injury damages ¹° Under the 1996 amendment, which does not otherwise change the sec. 104(a)(2) analysis set forth in Commissioner v. Schleier, 515 U.S. 323, 336-337 (1995), injury or sickness must be physical income.

the personal in nature to exclude damages from gross Schleier, 515 U.S. 323, 336 (1995), established those requirements as:

the taxpayer must demonstrate that the First, underlying cause of action giving rise to the recovery is "based upon tort or ,tort type rights"; and second, the taxpayer must show that the damages were received "on account of personal injuries or sickness."

• Under the 1996 amendment, the personal injury or sickness for which the damages are received must be physical in nature.

In the present case, Mrs. Prasil received. the $7,650 settlement payment.pursuant to a settlement agreement with Heartland. When damages are received pursuant to a settlement agreement, the nature of the claim that was the actual basis for settlement controls whether such amounts are excludable under section 104(a)(2). United States v. Burke, supra at 237.

The determination of the nature of the claim is _a factual inquiry and is generally made by reference to the settlement agreement.

Robinson v. Commissioner, 102 T.C. 116, 126 (1994), affd.

in part and revd.

in part 70 F.3d 34 (5th Cir. 1995), and cases cited therein.

If the settlement agreement lacks express language stating what the settlement amount was paid to settle, we look to the intent of the payor, Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo. 1964-33 (citing Agar v.

Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per curiam T.C. Memo. 1960-21), based on all the facts and circumstances of the case, including the complaint filed and details surrounding the litigation. Robinson v. Commissioner, supra at 127.

If a settlement is attributable to claims based on tort or tort type rights as well as other rights, it may be necessary to determine which portion of the settlement is attributable to damages received based on tort or tort type rights. Similarly, it may be necessary to determine which portion, if any, of the settlement may be attributable to damages received for personal physical injuries or physical sickness.

In the instant case, we address first the question of whether the $7,650 settlement payment was received on account of a personal physical injury or physical sickness, if any.

That is because a resolution of this question in respondent's favor controls the disposition of the issue before us.

Petitioners would have this Court conclude that Heartland paid the $7,650 settlement payment to Mrs. Prasil because she suffered a "physical sickness"; i.e., she got very ill and her Sweet's syndrome worsened as a result of "the abuse that she took from this man [Mr. Lakner] down at work" such that she had to be hospitalized and could not walk. However, Mrs. Prasil admitted that she suffered from a preexisting medical condition prior to employment with Heartland, and there is no comparative evidence of the nature of. her condition before, during, or after employment with Heartland to determine the nature of Mrs.

Prasil's sickness, let alone the cause of her sickness.

In fact, Mrs. Prasil testified that "They [the doctors] thought I had leukemia, too.

And that's what was causing the Sweet's syndrome." Further, Mrs. Prasil's testimony appears to describe manifestations of a stress-induced illness; i.e., rash and fever, where "things that would happen to me [Mrs. Prasil] made me much worse". Other than petitioners' own self-serving testimony, the record is devoid of any evidence that Heartland's sex discrimination caused a physical injury to or the physical sickness of Mrs. Pr.asil.

We are not required to, and do not, accept petitioners' self-serving testimony without corroborating evidence.

Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th Cir.

19E⁹), affg. T.C. Memo. 1987-295; Geiger v. Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo.

1969-159; Tokarski v. Commissioner,

87 T.C. 74, 77 (1986).

Although we sympathize with Mrs. Prasil's medical condition, the uncorroborated evidence in the record does not support a conclusion that her maladies constitute a physical injury or a physical sickness caused by the conduct of Heartland or of Mr.

Lakner.

Even assuming arguendo that Mrs. Prasil suffered a personal physical injury or physical sickness, the record does not support the conclusion that Mrs. Prasil received the $7,650 settlement payment on account of such physical injury or physical sickness.

Pursuant to the settlement agreement, Mrs. Prasil released "any and all claims", including claims based on sex discrimination, against Heartland in exchange for $7,650. However, the settlement agreement did not specifically carve out any portion of the settlement payment as a settlement on account of personal physical injury or physical sickness, let alone make reference to a physical injury or a physical sickness, if any, resulting from any sex discrimination by Heartland.

Because the settlement agreement did not allocate any part of the settlement payment on account of a personal physical injury or physical sickness, and there is no evidence in the record to support such an allocation, we are not in a position to conclude that any part of the settlement payment was on account of physical injury or physical sickness.

In sum, we are unable to find that any portion of the $7,650 settlement payment was intended to compensate Mrs. Prasil for a personal physical injury or physical sickness.

In view of the foregoing, we hold that the $7,650 settlement payment that Mrs. Prasil received in 1999 in settlement of a sex discrimination claim against her former employer is includable in petitioners' gross income for 1999. Accordingly, we sustain respondent's determination in this regard.

We have considered all of the other arguments made by petitioners and, to the extent that we have not specifically addressed them, we conclude they are without merit.

To reflect our disposition of the disputed issue, as well as the parties' concessions, Decision will be entered under Rule 155.