DocketNumber: Nos. 20897-05, 1031-07
Citation Numbers: 2008 T.C. Memo. 158, 2008 Tax Ct. Memo LEXIS 159
Judges: \"Kroupa, Diane L.\"
Filed Date: 6/23/2008
Status: Non-Precedential
Modified Date: 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA,
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated by this reference. Petitioner resided in California at the time she filed the petitions. 2
Petitioner was an employee of the U.S. Postal Service (USPS) for several years continuing through 2004. Petitioner filed complaints with the U.S. Equal Employment Opportunity Commission (EEOC) in 1998 and 1999 alleging unlawful employment discrimination. Specifically, petitioner alleged she was discriminated against on the bases of race, national *161 origin, sex, religion, color, and age and that she was retaliated against for previously participating in EEOC activity. Petitioner asserted in the complaint that she was sexually harassed by a USPS coworker.
The EEOC issued a decision in petitioner's legal action in September 2002. The EEOC found that petitioner was sexually harassed at work and was discriminated against because of her sex. The EEOC did not find that petitioner was discriminated against because of her race, national origin, religion, or age, or that she was retaliated against for previously participating in EEOC activity. The EEOC awarded petitioner reasonable attorney's fees pursuant to
Once the EEOC issued its decision, the USPS then issued its Final Agency Decision in the legal action. The USPS awarded petitioner compensatory damages of $ 7,662 in past medical expenses and transportation, $ 14,033 for past benefits lost (leave without pay), and $ 12,000 in nonpecuniary compensatory damages. 3*162 The USPS paid petitioner the damages, totaling $ 33,695, on March 28, 2003.
Petitioner appealed the $ 33,695 USPS Final Agency Decision to the EEOC. The EEOC decided petitioner's appeal in May 2004. The EEOC found that petitioner was sexually harassed by her coworker and that the USPS failed to take appropriate corrective action. The EEOC noted that petitioner had provided sufficient documentation to substantiate or justify her request for additional compensatory damages, including a report from her psychologist and statements from friends and coworkers. The EEOC indicated that petitioner had suffered emotional distress due to the sexual harassment and USPS' failure to take action to stop the harassment. The EEOC also noted that petitioner's psychologist reported petitioner had experienced physical symptoms due to the psychiatric problems the harassment created.
Petitioner's friends and coworkers also indicated that petitioner suffered from physical symptoms due to the stress of the long-term harassment. These physical symptoms included *163 intensification of petitioner's asthma, sleep deprivation, skin irritation, appetite loss, severe headaches, and depression.
The EEOC determined on appeal that it was appropriate to modify the USPS Final Agency Decision. The EEOC determined that the USPS should pay petitioner a total of $ 115,000 in nonpecuniary damages, $ 33,542 in future pecuniary losses, $ 7,662 for medical expenses, and $ 14,033 for use of annual leave, sick leave and leave without pay. The EEOC again awarded petitioner reasonable attorney's fees pursuant to the fee-shifting regulation.
The USPS had already compensated petitioner for the medical expenses and the loss of leave in the Final Agency Decision. Therefore, the USPS paid petitioner an additional $ 103,000 in future pecuniary losses (in addition to the $ 12,000 it paid petitioner a year earlier) and the $ 33,542 in future pecuniary losses in June 2004.
The EEOC determined in both decisions, in September 2002 and May 2004, that petitioner was entitled to reasonable attorney's fees pursuant to the applicable fee-shifting regulation. In accordance with this decision, the USPS paid $ 16,602 in attorney's fees in 2003 and $ 4,686 in 2004 *164 on petitioner's behalf.
Petitioner timely filed returns for 2003 and 2004. Petitioner reported $ 43,050 of wages and $ 14,033 of other income on the return for 2003. Petitioner failed to report any of the income from the legal action other than the $ 14,033 of other income for 2003. Petitioner reported $ 43,086 of wages and $ 1,500 of income from gambling winnings on the return for 2004. Petitioner failed to report any of the income from the legal action for 2004.
Respondent issued deficiency notices to petitioner for 2003 and 2004 (the years at issue). Respondent determined that petitioner should have included the amounts she received in the legal action in her income for 2003 and 2004. 4 Respondent also determined that the accuracy-related penalty applies to petitioner's tax liabilities for 2003 and 2004. Petitioner timely filed petitions.
OPINION
We are asked to decide whether petitioner must include in her income an award from a legal action *165 against her employer. We are also asked to decide whether petitioner is liable for the accuracy-related penalty. The funds awarded from the legal action fall into three categories, each with different rules governing when the funds must be included in income. We shall consider each category separately, beginning with nonpecuniary damages and future pecuniary losses. 5
We now consider whether petitioner must include in income the portion of the award for nonpecuniary damages and future pecuniary losses. 6*166 Gross income generally includes all income from whatever source derived.
Damages (other than punitive damages) received on account of personal physical injuries or physical sickness may generally be excluded from gross income.
Respondent *167 concedes that the underlying cause of action in this case is based in tort or tort-type rights. Respondent argues, however, that the damages petitioner received were not on account of personal physical injuries or physical sickness. We agree. We find compelling the EEOC and USPS decisions and orders.
It is evident from the EEOC and USPS decisions and orders that none of the award was predicated on personal physical injury or physical sickness as the statute requires. The EEOC decision noted, and we acknowledge, that the sexual harassment petitioner suffered caused her emotional distress. We further acknowledge, as did the EEOC, that the emotional distress manifested itself in physical symptoms such as asthma, sleep deprivation, skin irritation, appetite loss, severe headaches, and depression. These physical symptoms were not the basis of the award petitioner received, however. Petitioner sought, and was awarded, relief for sexual harassment, discrimination based on sex, and the failure of the USPS to take appropriate corrective action.
The EEOC and USPS decisions and orders compensated petitioner for the emotional distress she suffered because of the sexual harassment she experienced *168 at work and her employer's failure to take appropriate corrective action. Despite her argument to the contrary, petitioner was not compensated for the physical symptoms she experienced as a result. Damages received on account of emotional distress, even when resultant physical symptoms occur, are not excludable from income under
We conclude that the nonpecuniary damages and future pecuniary losses awarded to petitioner as a result of the legal action were not received on account of personal physical injury or physical sickness. Petitioner therefore must include these damages in her income under
We now turn to the portion of the award for petitioner's past medical expenses and transportation. While a taxpayer may generally not exclude damages for emotional distress from income, an exception applies for amounts paid for medical care for emotional distress.
A reimbursement for medical expenses must be included in income in the year it was received to the extent a deduction was claimed on account of the medical expenses in a prior year.
Petitioner received $ 7,662 for past medical expenses and transportation in 2003. Petitioner failed to introduce evidence that she had not deducted the medical expenses in a prior taxable year. 8*170 Petitioner also failed to introduce evidence to demonstrate her costs for treating her emotional distress. Petitioner therefore cannot exclude the $ 7,662 reimbursement from income for 2003.
We now consider whether petitioner must include in income amounts paid to her attorney pursuant to the fee-shifting regulation. A litigant generally may not exclude the portion of recovery paid to his or her attorney where the litigant's recovery constitutes income.
The USPS paid petitioner's attorney $ 16,602 in 2003 and $ 4,686 in 2004 on petitioner's behalf. 9 These funds paid pursuant to the fee-shifting regulation are not excludable from petitioner's income. See
We finally consider whether petitioner is liable for the accuracy-related penalty under
A *172 taxpayer is liable for an accuracy-related penalty for any portion of an underpayment attributable to, among other things, negligence or disregard of rules and regulations. 10*173
Petitioner failed to report all but $ 14,033 of the funds she received from the legal action in 2003 and 2004. Petitioner testified that she consulted H&R Block to file the returns, but her testimony was unclear as to what advice she received and when she received it. Petitioner did not testify about any other efforts she made to properly report the award. Petitioner did not show she exercised reasonable diligence to determine that excluding the payments from income was the correct treatment. Nor has petitioner shown she had a reasonable basis for excluding the award from income. 11 Petitioner essentially argues that she suffered physical injuries and therefore the award should be excluded from her income. Petitioner misapplies the law because, under
The accuracy-related penalty under
A taxpayer reasonably relied on a professional tax adviser if the adviser was a competent professional who had sufficient expertise to justify the taxpayer's reliance on him or her, the taxpayer provided necessary and accurate information to the adviser, and the taxpayer relied in good faith on the adviser's judgment. See
Petitioner argues that *176 she reasonably relied on H&R Block to prepare the returns. We disagree. While petitioner testified at trial that she sought advice from H&R Block regarding her taxes, petitioner was unclear in her testimony about when she received advice and what advice she received. Petitioner's tax preparer did not testify. Petitioner has also failed to establish that she provided her preparer with all the necessary and accurate information concerning her legal action. We therefore do not find that petitioner reasonably relied on a professional tax adviser.
After considering all the facts and circumstances, we find that petitioner has failed to establish that she had reasonable cause and acted in good faith with respect to the underpayments of tax for the years at issue. Accordingly, we conclude that the accuracy-related penalty applies.
To reflect the foregoing and respondent's concession,
1. All section references are to the Internal Revenue Code (Code) in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All dollar amounts are rounded to the nearest dollar.↩
2. These two cases were consolidated for trial, briefing, and opinion in an Order from this Court dated Sept. 13, 2007.↩
3. The EEOC, the USPS, and the parties variously refer to certain of the damages as nonpecuniary compensatory damages. While the damages themselves are pecuniary, they compensated an injury that was not. We shall use the terms the parties used in referring to the damages as nonpecuniary compensatory damages.
4. Respondent concedes that petitioner reported $ 14,033 on the return for 2003, which corresponds to the portion of the award compensating petitioner for annual leave, sick leave, and leave without pay.↩
5. Petitioner does not claim that the burden of proof shifts to respondent under
6. We apply
7. The Supreme Court analyzed
8. Petitioner did not claim any deductions for medical expenses in 2003 or 2004. The record lacks any evidence regarding medical expenses in prior years.
9. Petitioner did not make any arguments on brief regarding why she should be entitled to exclude fees paid to her attorney on her behalf. She also did not argue, and we do not find, that she is entitled to any deduction for attorney's fees paid or incurred to prosecute unlawful discrimination under the amendments to
10. Respondent determined alternatively that petitioner is liable for the accuracy-related penalty for substantial understatements of income tax under
11. A return position generally has a reasonable basis if it is reasonably based on one or more of the authorities that constitute substantial authority for purposes of substantial understatements under
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Old Colony Trust Co. v. Commissioner , 49 S. Ct. 499 ( 1929 )
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Commissioner v. Schleier , 115 S. Ct. 2159 ( 1995 )