Thelma Ruffin, Petitioner

!

T.C. Summary Opinion 2011-136 UNITED TATES TAX COURT .

THELMA RUF IN, Petitioner v. COMMISSIO ER OF IN ERNAL REVENUE, Respondent Docket No. 11785-10S.

Filed December 7, 2011.

Thelma Ruf f in, pro se .

Robert M. Romasl ko, for respondent.

GUSTAFSON, Judge:

This case was heard pursuant to the provisions of - sectio(1 74631 of the Internal Revenue Code in effect when the petition was filed Pursuant to section 7463(b), the decision to be· eutered i not reviewable by any other court, 1Unless otherwise noted, citations herein of sections refer , and citations of Rules to the Internal Revenue Code (26 U. S. C. ) refer to the Tax Cou¼t Rules of Practice and Procedure .

SBBE0 DEC - 7 20H

and this opinion shall not be treated as precedent for any other case.

The Internal Revenue Service (IRS) determined a deficiency of $4,091 in petitioner Thelma Ruffin's Federal income tax for 2008.

The issue for decision is whether $12,500 that Ms. Ruffin received as settlement proceeds must be included in her gross income.² The IRS moved under Rule 121 for summary judgment on this issue; Ms. Ruffin filed a response; and it is clear that there are no material factual disputes, o the case can be decided as a matter of law without a tri 1.

For the reasons set forth below, we hold that the settlement proceeds must be included in Ms. Ruffin's gross income for 2008.

Background Ms. Ruffin alleges the following facts, which for purposes of this opinion we assume to be true.

Several times in the years 2002 to 2005, Ms. Ruffin submitted various job applications to the City of Chicago, but her applications were not given fair consideration. Ms. Ruffin joined a class action lawsuit against the City of Chicago, the Democratic Organization of Cook County, and others, which alleged 2The notice of deficie cy also made adjustments to Ms. Ruffin's child tax credit and additi nal child tax credit under section 24 and her earned income tax credit under section 32. these are computational adj stments that follow necessarily from the inclusion of the settlesent proceeds in income, and Ms. Ruffin does not dispute this showing.

The IRS's motiön for summary judgme'nt shows that - 3 that the defendants had violated a prior .consent decree and engaged in politically discriminat.óry hiring practices.

As her own claim of dam ges, Ms.. Ruffin filled out an "Accord'Claim Form" on which she tated in part:

H d I beenj given the opportunity to interview I am claiming nionetary damages dating back to as. early as 06/12/2002. for open emploÿment oppbrtunities, hired for the positionsì and earned salary ranging from 35- 40,000 a year. salary from thÅ City ofj Chicago--los[t] potential wages. Also, the City of Chicago for not affording me :the opportunity to interview and compete foj open available employment opportunities with the City of Chicago.

ï I was dhnied ithe opportunity to earri this I claim discrimination Idamages against I surely would have been The class action lawsuit res lted in an "Agreed Settlement Order and Accord".

The defendants established a "Claim Fund", and a court-appointed monitor divi .ed that fund among more than 1, 400 claimants, after considering - previously agreed upon factors. following:

Those factors include the the facts pre ente by the Claimant regarding the (a) alleged violation; the strength of (b) Claimant; the evidence presented by the the salary or rate of pay of (c) or held; the position sought the ratio of pplicants to the actual number of (d) positions filled; the economic »enefït of (e) number of eligible recipients; the action at issue and (f) (g) the amount of the Claim Fund; and the number of claims submitted.

|| Using those criteria, the monitor awarded $12,500 to Ms. Ruffin,(cid:16)042 and the City of Chicago issued Ms. Ruffi a chec dated May 30, 2008, in the amount of $12$500.

Ms. Ruffin filed a Federal income tax return for 2008 that did not report this settlement payment a income On March 15, 2010, the IRS issued to Mst Ruffin a notice of deficiency that adjusted her gross income to include the settlement proceeds and determined the resulting tax deficiency.

On May 24, 2010, Ms. Ruffin filed her petition, disputing that inclusion and asking this Court to redetermine her deficiency.

I.

General legal principles Discussion As a general rule, the IRS' s determinations are presumed correct, and the taxpayer has the burden of esta lishing that the determinations in the»notice óf deficiency are erroneous.

Rule 142 (a) ; Welch v. Helvering, 290 U. S 111, 115 (1933) .

However, this case is now before us on a motion for summary judgment under Rule 121.

In that context the mo ing party bears the . burden of establishings that there ar no genuine issues of material fact, and factual inferences are drawn in the light most favorable to the party opposing the motipn.

See Dahlstrom v.

Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commissioner,

Section 61(a) drovides t-he f llowing broad definition of the term "gross income":| "Except as otherwise provided in this subtitle, gross income means all ncome from whatever source derived", . Se ct ion 61 (a) is (cid:16)042 thus broad in it s s cope , and exclusions from gross income must be narrowly construed.

Commissioner v. Schleier, 51 U.S. 323, 328 (1995) .

.

II.

The parties'' cdntentions In· its motion for summary judgment, the IRS argues that Ms. Ruf'fin's settlenent proc eds fall within the broad scope of section 61 (a) :

.

15.

Based upon this claim form [quoted above] , This Court ical iguestion regarding settlement the cri lieu of what 'was the settlement paid."

petitioner was awarded damages for lost wages. has stated that proceeds is "i Baglev V. Commissioner, 105·T.C. 396, 406 (1995). settlement prodeeds rep esent something that would have been taxable, such as wages, are taxable. Estate of Williams v. Commissioner, T.C. Memo 2009-5.

then the settlement proceeds, If. the too, 16. Here petitio er's claim was for redress for lost wages, and accqrdingly, is taxable.

the award stemming from that claim Petitioner oppdses the FRS' s motion by contending that the settlement proceeds should npt be characterized as lost wages.

Instead, she characterizes them variously:

as a settlement for the defendants' violations of the law; as compensation for the city's rigged hiring system; as. mcnetary damages or award; and as political discrimination dam ges.

III. Analysis

For four reasons, we must hold in fávor of Èhe IRS:

A.

Lost wages are included in gross income.

The IRS is correct that the nature of the claim that was the basis for the settlement controls the nature of ihose damages for tax purposes. Cf. United SÈates v. Burkä, 504 U.S. 229, 237 (1992) (determining excludability from gross income under section 104 (a) (2)).

Thus, the nature of the damåges is dictated by the nature of the injury Asuffered, and here that injury was clearly wage-related.

The damages were paid for (in Ms. Ruffin's own words) "los[t] potential wages".

If the Citÿ of Chicago had hired Ms. Ruffin for one of the jobs for which she applied, the wages she earned from that job would have been subject to tax; because she was wrongly denied the chance to earn those (taxable) wages and received instead a settlement ayment to recompense that loss of (taxable) income, the payment that the City of Chicago made to compensate her for lost (taxable) wages takes on the taxable character of thê income it replaced.

B.

The settlement was not for physical sickness.

in uries or When the taxability of settlement proceeds is disputed, a common issue is whether the proceeds are exclude from income because they were "received * * * on account of personal physical injuries or physical sickness", under section lok (a) (2).

In this case, however, Ms. Ruffin makes no allegation that she received her settlement on account of "physical injuries or physical sickness", ·and ther is nothing in the record to suggest that her damages for the Cit of Chicago's discriminatory hiring practices had any physical component .

The record shows that emotional distress was one of the· forms of injury that the settlement was to redress; and a victim of mployment discrimination may in some circumstances suffer physical symptoms from the emotional distress of being mistreated; but section 104 (a) is clear that "emotional distress shall not be treated as a physical injury or physical si:ckness"; and the Legislative history of this statutory provision shows that " [i] t is intended that the term emotional distress includes symptoms (e.g., insomnia, headaches, stomach disorders) which maý result from such emotional distress.."

H.

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

Therefore, to e excludhble from gross income under section 104 (a) (2) , a settle ent award would have to be paid to a taxpayer on account of physical injury or þhysical sickness other than symptoms of emotional distress; but Ms. Ruffin has made no hint of suffering either emotional distress or such resulting injuries or sickness.

C.

Ms. Ruffin s alternative characterizations of settlement proceeds do not disprove that they were lost wages.

the Even if we accept Ms . R f f in s characterizations, they are not really at odds with the RS' s characterization of the proceeds as lost wages.

Damages can be both "lo¶t wages" and money damages" for "political discrimination".

jiIf we accept Ms. Ruffin's contention thÄt the proceeds are (fÒr example) a settlement for "political discrimination", that Çerm describes the nature of the wrong that the defendants comm(cid:16)041tted,but it does not describe the nature of the damages Ms. Ruffin received, which is the important issue in this suit.

If a hypothetical taxpayer were to receive settlement proceeds for an injury suffered in a politically motivated physical assault, then she might be able to claim that the settlement proceeds were received on account of personal physical injuries.

For tax purposes, the political motivation of the hypothetical assault would not be material; but the nature of the damages paid--i.e., a payment for physical injury--would dictate the tax c nsequences (i.e., under section 104 (a) (2)). Here t e political motivation for the City of Chicago's employment dis rimination iþ not material; but the nature of the damages paid- i.e., a payment for (in Ms. Ruffin's own words) "los[t] potential wages"--dictates the tax consequences.

D.

Settlement proceeds are taxable income even if they are not payment for "lost wages".

Even if we were to overlook evidence in the record and Ms. Ruffin's own characterization and conclude that the damages were not "lost wages", the damages would not thereby become non- taxable.

As we have noted, section 61(a) defines gross income to include "all income from whatever source derived", and exclusions f rom gros s income are to be narrowly cons trued .

Ms . Ruf f in received from the City of Chicago a payment of money, however it might be characterized.

It alls within the scope of the broad statutory term "all income" .

(Emphasis added. ) Unless she can point to a statutory provisiòn that excludes it from gross income, it is includëd. Her position appears to assume that the law excludes "settlenents", ór "monetary damages", or "political discrimination awardu" from gross income, but there is no such exception to section 61(a) .

PaymeNts in settlement of employment discrimination claims are ta able unless a statutory provision justifies exclusion from incóme.

See Seidel v. Commissioner, T.C. Memo. 2007-45, äffd. 324 Fed. Appx. 621 (9th Cir. 2009) .

There is no statutor provision that would exclude Ms. Ruffin's settlement payment from gross income, whether or not it was for "lost wages".

Cbnclusion We hold that the $12, 500 payment from the City of Chicago is includable in Ms . Ru fin' s gross income for tax year 2008, and we will grant the IRS' s motion.

For hat reason, An appropriate order and decision will be entered.

79. T.C. 340, 344 (1982) .