Colquitt v. Comm'r , 2009 Tax Ct. Summary LEXIS 27 ( 2009 )

T.C. Summary Opinion 2009-27
UNITED STATES TAX COURT
RONALD COLQUITT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15771-07S. Filed February 26, 2009.
Ronald Colquitt, pro se.
Dorit Shaybani-Rad, for respondent.
GERBER, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
On June 11, 2007, respondent issued a notice of deficiency
which determined that petitioner failed to report certain items
of income for the 2005 tax year. Respondent determined a
deficiency of $4,320 and an accuracy-related penalty under
section 6662(a) of $1,107. After concessions by both parties,
the only issue that remains is whether petitioner was required to
report as income $14,000 received from his former employer as a
result of his wrongful termination claim.
Background
Petitioner resided in California when he filed his petition.
Some of the facts have been stipulated and are so found. The
stipulation of facts and the attached exhibits are
incorporated herein by this reference. Portions of the record
have been sealed at the request of petitioner.
At the time of the controversy underlying this case,
petitioner was employed as a private investigator. During the
course of his employment petitioner suffered from a physical
injury or sickness while on an assignment. His employer asked
him to continue working despite the injury or sickness, and when
petitioner refused, he was fired. Subsequently, petitioner filed
suit against the former employer and ultimately received $14,000
on his claim in 2005.
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Petitioner timely filed a Form 1040, U.S. Individual Income
Tax Return, for the 2005 tax year. Petitioner did not report the
$14,000 recovery as income. Petitioner’s former employer did,
however, report the payment to respondent by filing a Form 1099-
MISC, Miscellaneous Income.
Discussion
Gross income includes “all income from whatever source
derived” unless specifically excluded. Sec. 61(a). Section
61(a) is broadly interpreted, but exclusions from income are
narrowly defined. Commissioner v. Schleier, 515 U.S. 323, 327-
328 (1995).
Section 104(a)(2) excludes damages received on account of
personal physical injury or physical sickness. To qualify under
section 104(a)(2), taxpayers must show: (1) The underlying cause
of action was based upon tort or tort-type rights and (2) the
damages were received on account of personal physical injuries or
physical sickness. Id. at 336-337; sec. 1.104-1(c), Income Tax
Regs.
I. Tort-Based Claim
The section 104(a)(2) requirement that petitioner’s claim
arise from a tort or tort-type rights obligates us to examine
State law, because State law determines the nature of the claim.
Venable v. Commissioner, T.C. Memo. 2003-240, affd. 110 Fed.
Appx. 421 (5th Cir. 2004).
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Under California law an employer’s right to fire an at-will
employee is limited by public policy considerations. Tameny v.
Atl. Richfield Co., 610 P.2d 1330, 1332-1333 (Cal. 1980). At-
will employees may recover tort damages from employers if they
can show they were discharged in contravention of fundamental
public policy. Id. at 1336. To prevail, employees must show
that important public constitutional or statutory interests were
contravened. Silo v. CHW Med. Found., 45 P.3d 1162, 1166 (Cal.
2002).
The California Labor Code forbids employers from requiring
or allowing any employee to be in any place of employment that is
not safe and healthful. Cal. Lab. Code sec. 6402 (West 2003).
Moreover, an employee cannot be discharged for refusing to
perform work which would result in a violation of the California
Labor Code and where the violation would create a real and
apparent hazard to that employee or to fellow employees. Cal.
Lab. Code sec. 6311 (West 2003).
Petitioner did have tort-based claims against his employer.
The record suggests at least two separate theories of recovery.
First, the employer’s insistence that petitioner continue working
in the conditions that caused his injury or sickness violated
Cal. Lab. Code sec. 6402 and could therefore support a claim of
negligence per se. Second, the termination of petitioner’s
employment because he refused to continue working in those
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conditions violated Cal. Lab. Code sec. 6311 and the underlying
public policy of ensuring safe workplace conditions.2 That would
support a claim for wrongful termination.
We are unpersuaded by respondent’s argument that
petitioner’s wrongful termination claim could have been grounded
in contract. Janda v. Madera Cmty. Hosp., 16 F. Supp. 2d 1181,
1188 (E.D. Cal. 1998). In the Janda case, bylaws approved and
adopted by the hospital’s governing board were mutually binding
on the hospital and the plaintiff-physician, creating an implied-
in-fact contract between the parties. Id. As a result, the
nondiscrimination provision in the bylaws limited the hospital’s
ability to terminate the plaintiff’s employment. The plaintiff
based his wrongful termination on that implied contractual
restriction. Here, there is nothing in the record that indicates
the existence of any express or implied contractual limitations
on the employer’s ability to terminate petitioner’s employment.
II. Physical Injury or Physical Sickness
For payments made after August 20, 1996, Congress amended
section 104(a)(2) to limit the exclusion to amounts received only
for physical injuries. Small Business Job Protection Act of
1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1838. Under prior
2
It is also noted that a few months after petitioner’s
recovery on his claim, California enacted a regulation
specifically addressing the injury or sickness petitioner
suffered. Cal. Code Regs. 8, sec. 3395 (2005).
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law the exclusion had also been granted for nonphysical injuries.
H. Conf. Rept. 104-737, at 301 (1996), 1996-3 C.B. 741, 1041.
We must again look to the nature of petitioner’s underlying
claim to determine whether the payment received was for a
physical injury or sickness. See Connolly v. Commissioner, T.C.
Memo. 2007-98. The determining factor is the payor’s intent or
dominant reason for making the payment. See Vincent v.
Commissioner, T.C. Memo. 2005-95. This is generally determined
by reference to the stated reasons for the payment and the
accompanying factual setting. Stocks v. Commissioner, 98 T.C. 1,
11 (1992); King- Knoll v. Commissioner, T.C. Memo. 2003-277.
However, a general release that is broad and inclusive gives no
indication as to the nature of the underlying claim. Connolly v.
Commissioner, supra. If the reason for the payment is not
thereby expressly given, the payor’s intent must be determined
from all the surrounding facts and circumstances. Henderson v.
Commissioner, T.C. Memo. 2003-168, affd. 104 Fed. Appx. 47 (9th
Cir. 2004).
In the sealed portion of the record, the reasons given for
the payment were general and unspecific. Thus, they are not
dispositive as to the nature of petitioner’s claim. However,
that portion of the record does specifically refer to
petitioner’s wrongful termination allegation and makes no mention
of any claim for negligence. This suggests the settlement
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proceeds were intended as payment only for petitioner’s wrongful
termination claim.
In turn, damages petitioner received for that wrongful
termination claim were not on account of physical injury or
sickness. In order to meet the physical injury or sickness
requirement of section 104(a)(2), petitioner must show that his
former employer’s actions caused or exacerbated his injury or
sickness. See Vincent v. Commissioner, supra.
In the Vincent case, the taxpayer suffered from active
peptic ulcer disease and was fired by her employer while on
disability leave. In her suit against her employer the taxpayer
claimed she was wrongfully terminated in violation of
California’s Fair Employment and Housing Act. Because she did
not allege that her employer’s actions caused or exacerbated her
condition, we found that the jury did not consider this issue and
therefore could not have awarded any portion of the damages on
the basis of a claim for personal physical injuries. We also
found that the jury awarded damages solely on the basis of the
employer’s discriminatory actions, which caused the taxpayer’s
lost wages and mental distress. Accordingly, we held the
taxpayer was not entitled to exclusion under section 104(a)(2).
Petitioner has likewise not shown the required causal
relationship. That he was physically injured or sick rendered
his termination wrongful, but this is not enough for exclusion
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under section 104(a)(2). He must demonstrate that he received
the payment on account of the physical injury or sickness. He
has not done so. The evidence in the record indicates that the
recovery was intended as “additional pay and benefits”. The
employer’s filing of the Form 1099-MISC confirms this. As in
Connolly v. Commissioner, supra, it indicates the employer
intended the payment to be for a nonphysical injury or sickness.
As the payment petitioner received would undoubtedly have been
taxed as income if he had not been wrongfully terminated,
permitting the exclusion would grant him a windfall. The Supreme
Court noted this defect in the prior law:
We concede that the original provision’s language does
go beyond what one might expect a purely tax-policy-
related “human capital” rationale to justify. That is
because the language excludes from taxation not only
those damages that aim to substitute for a victim’s
physical or personal well-being--personal assets that
the Government does not tax and would not have taxed
had the victim not lost them. It also excludes from
taxation those damages that substitute, say, for lost
wages, which would have been taxed had the victim
earned them. To that extent, the provision can make
the compensated taxpayer better off from a tax
perspective than had the personal injury not taken
place.
O’Gilvie v. United States, 519 U.S. 79, 86 (1996). The addition
of the “physical” injury requirement by the 1996 amendment was
clearly meant to prevent this.
Even assuming that a portion of petitioner’s recovery was
attributable to a negligence claim and therefore compensation for
physical injury or sickness, he has not demonstrated how much of
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the recovery should be apportioned to that claim. Because the
Court is not allowed to make that allocation, the entire amount
is not excludable under section 104(a)(2). See Whitehead v.
Commissioner, T.C. Memo. 1980-508.
For these reasons, we hold that the payment to petitioner
was not damages received on account of personal physical injury
or sickness and therefore is not excludable from income under
section 104(a)(2).
To reflect the foregoing,
Decision will be entered
under Rule 155.