Debra Blum v. Cir

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS JUN 2 2022
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
DEBRA JEAN BLUM, No. 21-71113
Petitioner-Appellant, Tax Ct. No. 20020-17
v.
COMMISSIONER OF INTERNAL AMENDED MEMORANDUM*
REVENUE,
Respondent-Appellee.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted March 8, 2022
Seattle, Washington
Before: NGUYEN, MILLER, and BUMATAY, Circuit Judges.
Debra Blum appeals from a Tax Court decision upholding the Internal
Revenue Service’s tax deficiency determination of $27,418.00. We review the Tax
Court’s interpretations of the Tax Code de novo, Meruelo v. Comm’r, 691 F.3d 1108,
1114 (9th Cir. 2012), and findings of fact for clear error, Boyd Gaming Corp. v.
Comm’r, 177 F.3d 1096, 1098 (9th Cir. 1999). We have jurisdiction under 26 U.S.C.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
§ 7482(a)(1) and affirm.
The Tax Court properly found that Blum’s legal malpractice settlement
proceeds were not exempt from taxation under 26 U.S.C. § 104(a)(2). As a general
matter, the Tax Code provides that “gross income means all income from whatever
source derived.” 26 U.S.C. § 61(a). The Tax Code, however, excludes from taxable
income “the amount of any damages . . . received (whether by suit or agreement . . .)
on account of personal physical injuries or physical sickness.” 26 U.S.C.
§ 104(a)(2).
To exclude income under § 104(a)(2), a taxpayer must show that “the damages
were received on account of personal physical injuries or physical sickness.” Rivera
v. Baker W., Inc., 430 F.3d 1253, 1256 (9th Cir. 2005) (simplified). This requirement
can only be satisfied if there is a “direct causal link” between the damages and the
personal injury suffered. Id. at 1257 (simplified). In the context of a settlement
agreement, a taxpayer can establish that direct causal link through the express terms
of the agreement or, if the terms of the agreement are unclear, by the intent of the
payors. See id.The express terms of Blum’s settlement agreement make clear that there was
no direct causal link between the legal malpractice settlement and her physical
injuries. The settlement agreement expressly states that Blum and her attorneys
maintain “that Blum did not sustain any physical injuries as a result of the alleged
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negligence of either Kozlowski or Celski [her attorneys].” And the agreement
further states that it was entered into “for the purpose of compromising and settling
the [malpractice] dispute between [the parties].” Taken together, the express terms
of the agreement demonstrate that the settlement was entered to compensate Blum
for the harm caused by her lawyers’ legal malpractice, rather than the physical
injuries she sustained in her underlying negligence action. As the Tax Court
accurately put it, the terms of the agreement “make[] clear that the payment was in
lieu of damages for legal malpractice.”
When the express terms of the agreement make the purpose of the settlement
clear, we need not look to the intent of the payors. See Rivera, 430 F.3d at 1257.
Because the agreement’s express terms clearly indicate that Blum was not
compensated for her physical injuries, the Tax Court properly concluded that the
settlement proceeds were not exempt from taxation under § 104(a)(2).
AFFIRMED.
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