Roemer v. Commissioner , 79 T.C. 398 ( 1982 )

Forrester, J.,

dissenting: Section 61(a) reads: "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived.” Section 104(a)(2) provides: "In General * * * gross income does not include * * * (2) the amount of any damages received * * * on account of personal injuries.”

The majority correctly concludes that the exception clause of section 61 has validity; that section 104 exercises that exception, and that in a tort action, such as libel, no distinction is to be made between physical and mental or emotional injury.

At this point, the majority opines that a distinction must be made between defamatory injury to personal reputation vis-a-vis defamatory injury to business or professional reputation "to the extent it has or may affect * * * income.”

At this point, I must depart the company of the majority for in my view no such distinction is possible in the factual posture here presented.

The term business or professional reputation does not refer to some intangible other than reputation, generally (or personal reputation). It does refer to the manifestation of that intangible in the context of one’s career, as opposed to one’s family and social life.

This is particularly evident in the instant case. Petitioner built an extremely successful insurance practice by making as many social friends and acquaintances as possible (through memberships in social and civic clubs and organizations) and then cultivating them into business clients. The net result was that almost all of his personal friends were also his business clients, and vice versa. The personal and professional sides of his reputation were so intertwined as to be inseparable.and indistinguishable.

The test, therefore, of excludability under section 104(a)(2) is not one of injury to personal versus business reputation, as in either case, the injury is to reputation — a personal injury— and therefore excludable. Instead, I believe the proper inquiry is whether the injury sought to be redressed is one to reputation, at all, or only to one’s occupation; as, for an example, an automobile dealer who has for years increased his volume of new car sales on the strength of his reputation for maintaining and operating an excellent service department. This operation is maliciously slandered by a competitor and tortious damage results. The slander obviously has nothing to do with the personal reputation (character, honesty, etc.) of the dealer, and the award of damages to him would be wholly business-related and outside the scope of section 104(a)(2).

I am well aware that the determination of whether the true nature of the claim in a given situation is injury to reputation or injury to occupation will not always be an easy one. This is especially true where a libel or slander is the impetus for the action. The determination will have to be made on the basis of all the facts and circumstances. While no single factor should be determinative, the following factors are among those which should be considered: (1) The statements made, i.e., whether they are directed at the person’s character (honesty, personal habits, etc.) or at his occupation (incompetence, etc.); (2) the geographic area where the statement is published relative to the taxpayer’s business and residence; (3) the nature of the taxpayer’s occupation; (4) the definitional nature of the action under local law; (5) the relief sought in the complaint; (6) the arguments presented to the jury; (7) the classification (if any) of the damages awarded; and (8) the evidence presented to the jury.

Care must be taken when considering arguments and evidence presented to the jury to determine whether facts concerning professional injury and lost profits are the injury sought to be compensated, or are merely to show the collateral effects of injury to reputation in an effort to prove the extent or severity of the damages. See generally State Fish Corp. v. Commissioner, 48 T.C. 465 (1967).

Applying these factors to the instant case, I would hold that the damages awarded to petitioner were for injury to his reputation and not to his occupation. Clearly, his profession suffered ill effects as a result of the libel, but the predominant wrong sought to be redressed by petitioner was injury to his personal reputation. The occupational damage and evidence regarding it were merely manifestations of that injury.

Consider how this petitioner could have convinced the jury of the enormity of the damage done to him. He could have said he was very, very, very humiliated and hurt; or he could have showed them, as he did, that his personal service business, built upon trust, confidence, and honesty, was financially wounded and nearly destroyed.

I would hold that the compensatory damages received by petitioner are excludable under section 104(a)(2).

I agree with the reasoning of the majority regarding the punitive damages but, of course, would conclude that they were awarded on account of personal injuries and therefore excludable.

The question of exclusion of costs is not moot under the result I would reach. Clearly, no deduction could be allowed under section 212 because no taxable income has been produced or collected nor has property held for the production of income been managed, conserved, or maintained.

I agree with petitioner that the reimbursement of his costs constituted merely a recovery of his capital, not to be included in gross income. The Supreme Court has held that gross income is the gain derived from capital, from labor, or from both combined. Eisner v. Macomber, 252 U.S. 189, 207 (1920); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955). The operative word, of course, is gain, and this petitioner has realized no gain when he gets back what was his to start with. Cochrane v. Commissioner, 23 B.T.A. 202 (1931); Haney v. Commissioner, 5 B.T.A. 1039 (1927); Gray v. Commissioner, 10 T.C. 590 (1948).

Kórner, J., agrees with this dissent.