Juanita Smallwood v. United States Government

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS FILED
FOR THE NINTH CIRCUIT JUN 24 2015
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
JUANITA M. SMALLWOOD, No. 13-55304
Plaintiff - Appellant, D.C. No. 5:12-cv-00023-VAP-
DTB
v.
UNITED STATES GOVERNMENT, MEMORANDUM*
Defendant - Appellee.
Appeal from the United States District Court
for the Central District of California
Virginia A. Phillips, District Judge, Presiding
Argued and Submitted June 3, 2015
Pasadena, California
Before: FISHER and BYBEE, Circuit Judges and FOOTE,** District Judge.
Plaintiff-appellant Juanita M. Smallwood appeals the district court’s grant of
summary judgment in favor of the United States, wherein the district court found
that Smallwood was not entitled to a refund for the taxes that she paid on
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
**
The Honorable Elizabeth E. Foote, United States District Judge for the
Western District of Louisiana, sitting by designation.
settlement proceeds she received in 2004 in connection with a state court action
against the California Department of Corrections (“CDC”) and two of its
employees. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we review de
novo the district court's grant of summary judgment and its interpretation of the
Internal Revenue Code. Reynoso v. United States, 692 F.3d 973, 977 (9th Cir.
2012).
We agree with the district court’s determination that there is a genuine
factual dispute as to what dollar amount, if any, of the settlement proceeds from the
CDC was intended to compensate Smallwood for her physical injuries or physical
sickness. Under 26 U.S.C. § 104(a)(2), Smallwood would be entitled to exclude
from her gross income for 2004 the portion of the settlement proceeds that was
paid to her with the intent of compensating her for physical injuries or physical
sickness. 26 U.S.C. § 104(a)(2) (explaining “gross income does not include . . . 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 physical injuries or physical sickness”); see Rivera v. Baker W., Inc., 430
F.3d 1253, 1256-57 (9th Cir. 2005).
Nevertheless, instead of making a factual determination regarding what
dollar amount of the settlement proceeds was attributable to Smallwood’s physical
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injuries or physical sickness within the meaning of § 104(a)(2) and therefore
excludable from gross income, the district court erroneously found that Smallwood
had failed to establish that she was entitled to any refund as a matter of law. The
district court reasoned that because Smallwood failed to report her attorney’s fees
and litigation expenses as part of her gross income for 2004, any potential refund
must be offset by including all of those fees and expenses in her gross income and
overall tax burden for that year. However, the district court’s conclusion was in
error for two reasons. First, the district court incorrectly calculated what portion of
the settlement proceeds would need to be attributable to Smallwood’s physical
injuries or physical sickness in order for her to receive a tax refund for 2004. As
the government explains on appeal, “if the court were to determine that a certain
percentage of the settlement proceeds was paid on account of physical injury, that
percentage would apply to the entire $995,000 settlement, including the amount
retained by the attorney.” Second, the district court erred by failing to consider
whether Smallwood would be entitled to any deductions for her attorney’s fees and
litigation costs relating to the underlying state court settlement, which may have
reduced her overall tax burden for 2004. Again, as the government explains on
appeal, “any taxable component of the award would generate a (potential)
deduction for the corresponding portion of the attorney’s fee.” Certainly, once
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these errors are resolved, there may be other factual and legal determinations that
need to be made by the district court in order to ascertain whether Smallwood is
entitled to a refund.
In light of these errors, we vacate and remand to the district court for further
proceedings.
Costs of appeal are awarded to Smallwood.
VACATED AND REMANDED.
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