                         T.C. Memo. 2001-86



                       UNITED STATES TAX COURT



                    FRED HENRY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26254-96.                        Filed April 9, 2001.


     Robert G. Gargiulo, for petitioner.

     Stephen R. Takeuchi, for respondent.



                 SUPPLEMENTAL MEMORANDUM OPINION


     CHIECHI, Judge:    This case is before us on remand from the

Court of Appeals for the Eleventh Circuit in Henry v. Commis-

sioner, 234 F.3d 34 (11th Cir. 2000), vacating and remanding

without published opinion T.C. Memo. 1999-205.     The Court of

Appeals remanded this case for further consideration in light of

Fabry v. Commissioner, 223 F.3d 1261 (11th Cir. 2000), revg. 111
                                 - 2 -

T.C. 305 (1998).   In remanding this case for that purpose, the

Court of Appeals stated:     “We imply no view as to the result that

should be reached on remand.”1

     The findings of fact are set forth in Henry v. Commissioner,

T.C. Memo. 1999-205 (Henry I), and are incorporated herein by

this reference.2

Fabry v. Commissioner

     In Fabry v. Commissioner, 111 T.C. 305 (1998) (Fabry I), the

taxpayers (the Fabrys) operated a nursery in which they grew

ornamental plants, and they developed a reputation for growing

quality plants.    See id. at 306.   In connection with the opera-

tion of their nursery, the Fabrys used Benlate, a fungicide, on

the plants that they grew and suffered extensive damage to those

plants, which they claimed was the result of their use of

Benlate.   See id. at 307.    The Fabrys sued du Pont, the manufac-


     1
      By order of the Court, the parties filed opening and an-
swering briefs on remand in which they set forth their respective
positions on the result that we should reach on remand. In
petitioner’s opening brief on remand, petitioner proposes certain
findings of fact. Each of the findings of fact proposed in
petitioner’s opening brief on remand was proposed as a finding of
fact in the opening brief that petitioner filed after the trial
in this case (petitioner’s posttrial brief). In finding the
facts on the basis of the record in this case that are set forth
in Henry v. Commissioner, T.C. Memo. 1999-205, the Court care-
fully considered each of the findings of fact proposed in peti-
tioner’s posttrial brief, including those findings of fact that
are also proposed in petitioner’s opening brief on remand. On
that record, we decline to find any additional facts.
     2
      The stipulations of fact and exhibits attached thereto are
also incorporated herein by this reference.
                                  - 3 -

turer of Benlate, in the Court of the Ninth Judicial Circuit in

and for Orange County, Florida.     In that suit, the Fabrys alleged

that du Pont had allowed Benlate to become contaminated so as to

cause the damages that they suffered from having used it on their

stock of plants.   The Fabrys demanded a judgment for monetary

damages from du Pont under theories of negligence and strict

liability in tort.   Under both theories, the Fabrys claimed that

they sustained damages in the form of the lost value of destroyed

or injured plants, damage to their business reputation, lost

income, and the lost value of their business.    After mediation,

the suit which the Fabrys instituted against du Pont was con-

cluded pursuant to a stipulation under which du Pont agreed to

pay them $3,800,000.    See id.

     The Commissioner of Internal Revenue (Commissioner) conceded

in Fabry I that $500,000 of the $3,800,000 that du Pont paid to

the Fabrys constituted damages for injury to their business

reputation.   See id.   Thus, there was no dispute between the

parties in Fabry I, as there was in Henry I, that a specified

amount of the total damages paid was paid as damages for injury

to business reputation.   The only question presented to us in

Fabry I was whether, as argued by the Fabrys, the $500,000 that

du Pont paid to them as such damages was received on account of

personal injuries, as that term is used in section 104(a)(2).

See id. at 308.
                               - 4 -

     In advancing their position in Fabry I, the Fabrys main-

tained that injury to business reputation is, as a matter of law,

a personal injury within the meaning of section 104(a)(2).    See

id. at 309.   We rejected that argument.   See id. at 310-311.

Having rejected the Fabrys’ argument that injury to business

reputation is, as a matter of law, a personal injury within the

meaning of section 104(a)(2), we examined the facts and circum-

stances surrounding the $500,000 payment at issue in that case in

order to determine whether that payment was made on account of

personal injuries, as that term is used in section 104(a)(2).

See id. at 311-314.   Based on our examination of all the facts

and circumstances surrounding that $500,000 payment, we concluded

in Fabry I:

          Since the record of the lawsuit that is before us
     does not include any claim for personal injuries within
     the meaning of section 104(a)(2), we do not believe
     that the claim for injury to business reputation was on
     account of personal injuries, as that term is used in
     section 104(a)(2). * * *

Id. at 314.

     The Court of Appeals reversed our decision in Fabry I in

Fabry v. Commissioner, 223 F.3d 1261 (11th Cir. 2000) (Fabry II).

After reviewing certain case law under section 104(a)(2), the

Court of Appeals turned to this Court’s opinion in Fabry I.      The

Court of Appeals acknowledged in Fabry II that “The IRS stipu-

lated at trial that the $500,000 payment was properly allocable
                                  - 5 -

as damage to the Fabry’s business reputation”,3 id. at 1268-1269,

and that the case presented a single question of law, i.e.,

whether the $500,000 of damages that du Pont paid to the Fabrys

for injury to their business reputation was a payment received on

account of personal injuries within the meaning of section

104(a)(2), see id.   The Court of Appeals found our facts and

circumstances approach to that question in Fabry I to be insuffi-

cient.   See id. at 1269.   The Court of Appeals stated:   “Its [the

Tax Court’s] method of merely perusing the record, looking for

the presence of the magic words, ‘personal injury,’ either in the

complaint, the release, mediation correspondence or settlement

documents is incorrect.”    Id.

     In deciding Fabry II, the Court of Appeals examined intangi-

ble injuries such as injury to business reputation in light of



     3
      In this regard, the Court of Appeals noted:

           At trial, the IRS stipulated that: (1) du Pont
     was aware from the beginning that the Fabrys’ claim
     included a claim for damage to their business reputa-
     tion; (2) that throughout settlement discussions the
     Fabrys had steadfastly presented a $500,000 claim for
     damage to their business reputation; (3) that du Pont
     never disputed the Fabrys’ claim for business reputa-
     tion damage throughout the mediation; (4) that du Pont
     sought and obtained a release specifically with respect
     to the business reputation claim; and (5) that du Pont
     would not have settled the case without a release of
     the claim for damage to the Fabrys’ business reputa-
     tion.

Fabry v. Commissioner, 223 F.3d 1261, 1268-1269 n.21 (11th Cir.
2000), revg. 111 T.C. 305 (1998).
                                 - 6 -

Commissioner v. Schleier, 515 U.S. 323 (1995), and cases decided

after Schleier, including O’Gilvie v. United States, 519 U.S. 79

(1996), and Greer v. United States, 207 F.3d 322 (6th Cir. 2000).

See Fabry v. Commissioner, supra at 1269-1270.     The Court of

Appeals then examined what it considered to be the “unique facts”

presented in Fabry.     See id. at 1270-1271.   On the basis of that

examination, the Court of Appeals held that, in light of those

unique facts, the Fabrys had established that the $500,000 which

the Commissioner conceded was paid by du Pont as damages for

injury to their business reputation was received on account of

personal injuries, as required by Commissioner v. Schleier, supra

at 337, and consequently is excludable from gross income under

section 104(a)(2).    See Fabry v. Commissioner, supra at 1271.

Henry v. Commissioner

     While summarizing the procedural background of the case

before it on appeal in Fabry v. Commissioner, supra, the Court of

Appeals cited in a footnote our opinion in Henry v. Commissioner,

T.C. Memo. 1999-205, and described our findings in that opinion

as follows:

     6.   See also Henry v. Commissioner, 77 T.C.M. (CCH)
     2209, 1999 WL 405225 (1999)(where, relying upon its
     opinion in this case, Fabry v. Commissioner, 111 T.C.
     305, 1998 WL 872851 (1998), the tax court found that
     the $1,623,203 payment received in 1994 by the tax-
     payer, a Florida orchid grower, for loss of business
     reputation and loss of business reputation as an orchid
     grower, in settlement of his claim for negligence and
     strict liability in tort against du Pont, after appli-
     cation of its chemical fungicide on his orchids, was
                                 - 7 -

     not made “on account of personal injuries” within the
     meaning of IRC § 104 * * * [a](2) and was includable in
     gross income for income tax purposes).

Fabry v. Commissioner, supra at 1263 n.6.

        With all due respect, we did not find in Henry I that the

$1,623,203 payment that petitioner received from du Pont in 1994

was for loss of business reputation and loss of business reputa-

tion as an orchid grower.     On the record presented to us, we

found in Henry I that “petitioner has failed to establish that

all or any portion of the $2,800,000 total settlement amount, or

the $1,623,203 settlement payment, was paid by reason of, or

because of, the loss of the plaintiffs’ business reputation or

the loss of their reputation as orchid growers.”     Henry v.

Commissioner, 77 T.C.M. (CCH) 2209, 2222, 1999 T.C.M. (RIA) 1238,

1255.     In making the foregoing finding, we carefully reviewed the

record in the instant case, which included portions of the record

in the lawsuit (lawsuit) that petitioner and his former spouse

Donna Henry, d.b.a. Fred Henry’s Paradise of Orchids (collec-

tively the plaintiffs), had filed against du Pont and others.       In

the lawsuit, the plaintiffs alleged, inter alia, negligence by du

Pont and strict liability in tort of du Pont.     See Henry v.

Commissioner, 77 T.C.M. (CCH) at 2213-2214, 1999 T.C.M. (RIA) at

1244-1245.     The plaintiffs alleged in the lawsuit that the

damages to them were a direct and proximate result of the negli-

gence of du Pont and the defective condition of Benlate.     The
                              - 8 -

plaintiffs claimed as damages in the lawsuit (i.e., as losses)

that they suffered and continue to suffer

     lost profits, loss of business, loss of business repu-
     tation, loss of the reputation of FRED HENRY and DONNA
     HENRY as orchid growers, diminution of sales, incurred
     additional business expenses, have had a reduction in
     the value of the business, have lost plants, have
     suffered a diminution in the value of their nursery as
     a result of chemical contamination of the soil, and
     have suffered other consequential losses and damages.

Henry v. Commissioner, 77 T.C.M. (CCH) at 2214, 1999 T.C.M. (RIA)

at 1244-1245.

     Although the plaintiffs claimed damages in the lawsuit for

injury to their business reputation and injury to their reputa-

tion as orchid growers, at the conclusion of the trial in that

lawsuit, which lasted about a month, the plaintiffs’ attorney

informed the jury in closing arguments that the plaintiffs were

not asking for damages for loss of reputation.   He stated in

pertinent part:

          Now, this is probably the simplest economic chart
     ever presented in a case, but basically what it boils
     down to is this. Remember we had Dr. Reavy come up and
     explain to you that he looked at the inventory, and
     what he did, he only did one thing with the inventory,
     and that is, he reduced it from retail to wholesale.
     In other words, when they had done the inventory, they
     did it on a retail basis, and Dr. Reavy said, no, wait
     a minute; if he’s going to be a wholesale grower, we’ll
     put a wholesale value on it. Dr. Reavy actually re-
     duced the inventory to this 3,254,000 to reflect the
     wholesale value of the plants. Then, if you may remem-
     ber, what we did then was I said, now, Dr. Reavy, if
     you figure in just eight percent a year on that money
     for the last two years, what are the losses to Fred and
     Donna because of the loss of their inventory. When you
     figure in the eight percent for two years, it comes out
                                - 9 -

     to $3,796,000.

          Now, I submit to you that that’s a very conserva-
     tive figure when you think about it. All we’re asking
     for here is the inventory. We’re not asking for
     business--or the loss of the business or loss of repu-
     tation or any of that sort of stuff. That’s purely the
     value of the inventory. [Emphasis added.]

Henry v. Commissioner, 77 T.C.M. (CCH) at 2215, 1999 T.C.M. (RIA)

at 1246-1247.4

     After the trial in the lawsuit, the jury rendered a verdict

(jury verdict) finding (1) that du Pont placed Benlate on the

market with a defect which was the legal cause of damage to the

plaintiffs, (2) that there was negligence on the part of du Pont

which was a legal cause of damage to them, and (3) that there was

negligence on the part of the plaintiffs which was a legal cause

of damage to them.    The jury charged 80 percent of total respon-

sibility to du Pont and 20 percent of total responsibility to the



     4
      In Henry I, we found the statements of plaintiffs’ attorney
in closing arguments to the jury to be consistent with the
evidence submitted by the plaintiffs to that jury with respect to
the loss that they claimed they suffered as a result of their
applying Benlate to the orchid plants of Fred Henry’s Paradise of
Orchids. That evidence consisted of the testimony of the plain-
tiffs’ expert, an economist, that the value of the plaintiffs’
inventory of orchid plants was $3,254,559, to which that expert
added eight percent interest in order to arrive at the total loss
that the plaintiffs claimed in that lawsuit, or $3,796,118. Du
Pont also presented evidence in the lawsuit through an expert who
valued the plaintiffs’ inventory at $75,000 and who concluded
that the total loss of the plaintiffs was between $172,995 and
$267,803. No other witness testified in the lawsuit concerning
the damages sustained by the plaintiffs. See Henry v. Commis-
sioner, 77 T.C.M. (CCH) 2209, 2222, 1999 T.C.M. (RIA) 1238, 1254-
1255.
                              - 10 -

plaintiffs.   In other words, the jury found du Pont 80 percent

negligent and the plaintiffs 20 percent negligent.   The jury

further found that the total amount of damages sustained by the

plaintiffs, without any reduction for the percentage of responsi-

bility that the jury charged to them, was $3,796,318.   The total

amount of damages was reduced to $3,037,054 to take account of

the jury verdict that the plaintiffs were 20 percent negligent.

On motion of du Pont, the judgment of $3,037,054 was reduced to

$2,837,054 in order to account for the total of $200,000 in

assistance payments that du Pont had made to Mr. Henry in 1991

and 1992.   On December 8, 1993, the Florida court entered an

amended final judgment (judgment) in the plaintiffs’ favor in the

amount of $2,837,054.   See Henry v. Commissioner, 77 T.C.M. (CCH)

at 2216, 1999 T.C.M. (RIA) at 1247.

     While the judgment was on appeal by du Pont, the plaintiffs

and du Pont engaged in settlement negotiations.    As a result of

those negotiations, the plaintiffs offered to settle the lawsuit

for $2,800,000, and that settlement offer was accepted by du Pont

on the date it was made.   That $2,800,000 settlement negotiated

between the plaintiffs and du Pont, which was part of a global

settlement of approximately 200 claimants against du Pont, was

paid by du Pont as a result of the jury verdict.   Pursuant to the

stipulation of settlement to which the plaintiffs and du Pont

agreed (stipulation of settlement), (1) du Pont agreed to pay the
                              - 11 -

plaintiffs’ cost of the lawsuit, (2) the plaintiffs executed a

document entitled “RELEASE, INDEMNITY AND ASSIGNMENT” (release,

indemnity, and assignment), and (3) a notice of voluntary dis-

missal of the appeal of the lawsuit was filed on or about May 13,

1994.5   See id.

     In Henry I, we found nothing in the record before us,

including the stipulation of settlement and the release, indem-

nity, and assignment,6 which established that all, or even a

portion, of the total settlement amount, or the total settlement

payment, was paid on account of the loss of the plaintiffs’

business reputation or the loss of their reputation as orchid

growers.7   Unlike Fabry v. Commissioner, 111 T.C. 305 (1998),

revd. 223 F.3d 1261 (11th Cir. 2000), the Commissioner did not

concede in Henry v. Commissioner, T.C. Memo. 1999-205, vacated

and remanded without published opinion 234 F.3d 34 (11th Cir.



     5
      Of the $2,800,000 that du Pont agreed in the stipulation of
settlement to pay the plaintiffs in the lawsuit, du Pont paid
$450,000 to the attorneys, $31,139.14 to various third parties, a
total of $695,658.26 to Donna Estes, and a total of $1,623,203 to
petitioner. See Henry v. Commissioner, 77 T.C.M. (CCH) at 2216,
1999 T.C.M. (RIA) at 1247.
     6
      The document in the record entitled “RELEASE, INDEMNITY AND
ASSIGNMENT” appears to be an incomplete copy of that document.
     7
      Nor did we find anything in the record in Henry I which
established that Mr. Henry received the $150,000 assistance
payment from du Pont in 1992 by reason of, or because of, loss of
business reputation or loss of reputation as an orchid grower.
See Henry v. Commissioner, 77 T.C.M. (CCH) 2209, 2219-2220, 1999
T.C.M. (RIA) 1238, 1251-1252.
                                - 12 -

2000), that all, or any portion, of the total settlement amount,

or the total settlement payment, was paid on account of the loss

of the plaintiffs’ business reputation or the loss of their

reputation as orchid growers.    Furthermore, unlike the facts

presented in Fabry, the record in Henry v. Commissioner, supra,

did not establish (1) that throughout the trial in the lawsuit

and/or throughout settlement discussions after the jury verdict

in the lawsuit the plaintiffs had steadfastly presented claims

for a specified dollar amount as damages for injury to their

business reputation and injury to their reputation as orchid

growers, (2) that du Pont never disputed the plaintiffs’ claims

for damages for injury to their business reputation and injury to

their reputation as orchid growers throughout the lawsuit and/or

those settlement discussions, (3) that du Pont sought and ob-

tained a release specifically with respect to the plaintiffs’

reputation claims, and (4) that du Pont would not have settled

the lawsuit without a release of the plaintiffs’ claims for

damages for injury to their business reputation and injury to

their reputation as orchid growers.      But see Fabry v. Commis-

sioner, 223 F.3d 1261, 1268-1269 n.21 (11th Cir. 2000); cf. supra

note 3.

     Although we found on the record presented to us in Henry I

that petitioner had failed to establish that all, or any portion,

of the $2,800,000 total settlement amount, or the $1,623,203
                              - 13 -

settlement payment, was paid by du Pont by reason of, or because

of, the loss of the plaintiffs’ business reputation or the loss

of their reputation as orchid growers, we nonetheless addressed

petitioner’s contention that “Damage to reputation is clearly

personal injury for the purpose of IRC § 104(a)(2)”.   We consid-

ered that contention solely “for the sake of completeness”.

Henry v. Commissioner, 77 T.C.M. (CCH) at 2222, 1999 T.C.M. (RIA)

at 1255.   We did not address that contention of petitioner

because we needed to do so in order to resolve the issue pre-

sented under section 104(a)(2) regarding the $1,623,203 settle-

ment payment, and we expressly so stated in our opinion.   See id.

As we understood petitioner’s position in Henry I, petitioner was

contending that damage to reputation is, as a matter of law,

personal injury within the meaning of section 104(a)(2).   We

noted that we had rejected such an argument in Fabry v. Commis-

sioner, 111 T.C. 305 (1998), and we rejected any such argument in

Henry I.   See id.

     We then described our approach and analysis in Fabry I and

applied the same approach and analysis in Henry I.   We stated in

Henry I:

     assuming arguendo that the $1,623,203 settlement pay-
     ment which petitioner received from du Pont during 1994
     had been paid for loss of his business reputation and
     loss of his reputation as an orchid grower, that pay-
     ment was not made on account of personal injuries
     within the meaning of section 104(a)(2). [Emphasis
     added.]
                              - 14 -

Henry v. Commissioner, 77 T.C.M. (CCH) at 2224, 1999 T.C.M. (RIA)

at 1258.

     However, as discussed above, we did not find on the record

presented to us in Henry I that the $1,623,203 settlement payment

was paid for loss of petitioner’s business reputation or loss of

his reputation as an orchid grower.    Instead, we found on that

record that

     petitioner has failed to establish that all or any
     portion of the $2,800,000 total settlement amount, or
     the $1,623,203 settlement payment, was paid by reason
     of, or because of, the loss of the plaintiffs’ business
     reputation or the loss of their reputation as orchid
     growers.

Henry v. Commissioner, 77 T.C.M. (CCH) at 2222, 1999 T.C.M. (RIA)

at 1255.   In light of the above-quoted finding that we made in

Henry I, we do not believe that the Court of Appeals’ opinion in

Fabry II requires us to change our finding in Henry I that, on

the record before us in this case, petitioner failed to establish

that the $1,623,203 settlement payment that he received during

1994 was made on account of personal injuries within the meaning

of section 104(a)(2), as construed by the Supreme Court in

Commissioner v. Schleier, 515 U.S. 323 (1995), and cases decided

after Schleier.8


     8
      In Fabry II, the Court of Appeals stated in a footnote:

     23. While we agree that the terms of the settlement
     agreement (and supporting documentation) is a factor to
     be considered, see Stocks v. Commissioner, 98 T.C. 1,
                                                   (continued...)
                              - 15 -

     We have carefully considered each of the remaining issues

that we decided in Henry I.   We conclude that nothing in Fabry II

requires us to change our findings as to any of those other

issues.

     On careful reconsideration pursuant to the mandate of the

Court of Appeals,

                                         Decision will be entered

                                    for the same years in the same

                                    amounts as previously entered

                                    in this case.




     8
      (...continued)
     10 * * * (1992), it is only one factor. Intent of the
     payor is also a factor to be considered. See Metzger
     v. Commissioner, 88 T.C. 834, 347-48 * * * (1987),
     aff’d. without published opinion, 845 F.2d 1013 (3d
     Cir. 1988); Knuckles v. Commissioner, 349 F.2d 610
     (10th Cir. 1965). * * *

Fabry v. Commissioner, 223 F.3d 1261, 1269 n.23 (11th Cir. 2000).

     With respect to the intent of the payor in Henry I, it is
noteworthy that du Pont, the payor, issued two Forms 1099-MISC
relating to the $2,800,000 that it paid pursuant to the stipula-
tion of settlement, which reflected its view that that payment is
nonemployee compensation. See Henry v. Commissioner, 77 T.C.M.
(CCH) at 2216, 1999 T.C.M. (RIA) at 1248.
