                        T.C. Memo. 2004-47



                      UNITED STATES TAX COURT



                JOSEPH TAMBERELLA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13879-01.             Filed March 3, 2004.


     Elizabeth Ann Maresca, Tatia Barnes, and Yael Neiman, for

petitioner.

     William C. Bogardus, for respondent.


                        MEMORANDUM OPINION


     PAJAK, Special Trial Judge:   Respondent determined a

deficiency of $26,589 in petitioner’s 1997 Federal income tax,

together with an addition to tax of $6,714.89 under section

6651(a)(1), and an accuracy-related penalty of $5,371.80 under

section 6662(a).   Unless otherwise indicated, section references

are to the Internal Revenue Code in effect for the year in issue.
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     The issues for decision are:    (1) Whether under section 104

petitioner may exclude from gross income $89,840 in proceeds from

a legal settlement; (2) whether petitioner is liable for the

section 6651(a)(1) addition to tax for failure to file on time a

Federal income tax return for 1997; and (3) whether petitioner is

liable for the accuracy-related penalty under section 6662(a).

     Some of the facts in this case have been stipulated and are

so found.   Petitioner resided in Deer Park, New York, at the time

he filed his petition.

     From 1994 to 1996, petitioner worked for a bus contractor,

ATC-Vancom of Nevada Limited Partnership, Inc. (ATC), in

Laughlin, Nevada.   Mr. Shawn Brophy was petitioner’s supervisor

at ATC.   In 1996, petitioner was living with Diane Macarino, her

two sons from a prior marriage, and petitioner and Ms. Macarino’s

son, Joseph.   Petitioner invited Mr. Brophy to live on

petitioner’s property and Mr. Brophy stayed about 2 months.

Then, Mr. Brophy moved Ms. Macarino and all three children out of

petitioner’s home and took them with him.   Obviously, petitioner

was concerned and upset about this turn of events.   Petitioner’s

father suffered a stroke.   About that time, petitioner was

diagnosed with and treated for mental illness and high blood

pressure.   Petitioner was hospitalized for these conditions for

approximately 10 days in 1996.

     Petitioner was terminated from his ATC employment in 1996.
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Petitioner claimed that he was terminated because he reported to

ATC, Nevada officials, and the public Mr. Brophy’s personal use

of a Nevada vehicle to move Ms. Macarino, petitioner’s son, and

the other two children out of petitioner’s home.    Petitioner

believed that Mr. Brophy’s use of the vehicle was illegal.      ATC

claimed that petitioner was terminated for job abandonment due to

petitioner’s failure to report for work for more than 2 weeks

without notifying his supervisors.

     In 1996, petitioner prepared and filed a complaint in the

Clark County District Court, Nevada, against ATC alleging

negligence, breach of contract, breach of public policy, and

wrongful discharge.   That case was submitted to nonbinding

arbitration.   Petitioner prepared and submitted a prearbitration

memorandum.    Petitioner also conducted cross-examination during

the hearing.   Petitioner sought reinstatement to his former

position with ATC, but he was not reinstated.    Petitioner

rejected the arbitration award.

     In 1997, petitioner entered into a Confidential Settlement

Agreement (settlement agreement) with ATC.    Pursuant to the

settlement agreement, petitioner received from ATC two payments

totaling $115,000.    The settlement agreement specifies that the

first payment, in the amount of $25,160, represents back wages.

This amount is not in issue here.    The settlement agreement

specifies that the second payment, in the amount of $89,840,
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represents “a litigation settlement of [petitioner’s] claims

against [ATC].”   This is the amount in issue.   The settlement

agreement provides that petitioner “agrees to waive any right to

reinstatement”.   The settlement agreement specifies that the

parties agree that the $89,840 will be reported by ATC on a “Form

1099” and that petitioner “acknowledges that some or all of the

monies” may be considered taxable.

     The $89,840 was reported by ATC to the Internal Revenue

Service on a Form 1099-MISC, Miscellaneous Income, as nonemployee

compensation.   Petitioner did not report this amount on his 1997

Federal income tax return.

     Petitioner contends that the $89,840 is excludable from his

income because such amount constitutes “proceeds from a lawsuit

settlement petitioner received from a former employer for medical

conditions of a permanent and dibilating [sic] nature.”

     Section 7491(a) does not affect the outcome because

petitioner’s liability for the deficiency is decided on the

preponderance of the evidence.

     Section 61(a) provides that gross income includes all income

from whatever source derived unless excludable by a specific

provision of the Code.   Section 104(a)(2) excludes from gross

income amounts received in damages, by suit or settlement, for

personal physical injuries or physical sickness.    The nature of

the claim underlying the damage award is the focus for
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determining whether damages received are excludable under section

104(a)(2).   United States v. Burke, 504 U.S. 229, 237 (1992).

The underlying claim giving rise to the recovery must be “based

upon tort or tort type rights” and the damages must have been

received “on account of personal injuries or sickness”.

Commissioner v. Schleier, 515 U.S. 323, 336 (1995).   Section

104(a)(2) was amended in 1996, effective for amounts received

after August 20, 1996, to require that personal injury or

sickness be physical in nature; this amendment does not otherwise

change the analysis under Commissioner v. Schleier, supra.

Prasil v. Commissioner, T.C. Memo. 2003-100, n.10.    We note that

for purposes of section 104(a)(2), emotional distress shall not

be treated as a physical injury or physical sickness except for

any damages that are not in excess of the amount paid for medical

care attributable to such emotional distress.   Sec. 104(a).

     Petitioner’s complaint alleged four causes of action,

negligence, breach of contract, breach of public policy, and

wrongful discharge.   Of these four causes of action, only

negligence could satisfy the second prong of the Commissioner v.

Schleier, supra, analysis, which requires that damages must have

been received “on account of personal [physical] injury or

[physical] sickness”.   The settlement agreement did not allocate

any portion of the settlement amount in issue to personal

physical injury or physical sickness.   Rather, the settlement
                               - 6 -

agreement expressly provided that the $89,840 would be reported

to the Internal Revenue Service on a Form 1099 and that some or

all of that amount may be taxable.     In the settlement agreement,

the parties characterized the $89,840 payment as “a litigation

settlement of [petitioner’s] claims against [ATC].”

     Where a settlement agreement is silent with respect to

precisely what the settlement amount is paid to settle, the

intent of the payor is examined.     Knuckles v. Commissioner, 349

F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo 1964-33 (citing

Agar v. Commissioner, 290 F.2d 283 (2d Cir. 1961), affg. per

curiam T.C. Memo. 1960-21).   This examination is made based on

all the surrounding facts and circumstances.     Robinson v.

Commissioner, 102 T.C. 116, 127 (1994), affd. in part and revd.

in part on another ground 70 F.3d 34 (5th Cir. 1995).

     There is no question that petitioner provided ATC’s attorney

with his 1996 medical records concerning his hospitalization for

mental illness and high blood pressure.    But there is nothing in

the record that establishes that ATC intended that any portion of

the $89,840 settlement amount paid to petitioner was on account

of personal physical injury or physical sickness.    Rather, the

record reveals that this amount reflects petitioner and ATC’s

settlement discussions about the amount to be paid to petitioner

to waive reinstatement of employment.    A letter, written by ATC’s

attorney to petitioner, states in pertinent part:
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     You stated that you would be willing to settle this matter
     for the sum of $45,000.00 including reinstatement to your
     former position of employment. You stated that $45,000.00
     figure was comprised of your estimate of your lost wages to
     date as well as the amount awarded by the arbitrator. At my
     suggestion, you also made an alternative settlement proposal
     without reinstatement. Specifically, you proposed a
     resolution of this matter for $150,000.00 which would not
     include reinstatement of your employment.

     Ultimately, petitioner and ATC settled for $115,000, of

which $25,160 represents back wages not in issue here.   It

appears that the remaining $89,840 represents the amount of the

arbitrator’s award, plus payment for petitioner’s waiver of any

right to reinstatement to his former position.   The settlement

agreement expressly provides that petitioner “agrees to waive any

rights to reinstatement or to apply for re-employment with

[ATC]”.   Petitioner presented no evidence other than his own

testimony that he “was physically injured” by ATC.   It is well

established that this Court is not bound to accept a taxpayer’s

self-serving, unverified, and undocumented testimony.    Shea v.

Commissioner, 112 T.C. 183, 189 (1999); Tokarski v. Commissioner,

87 T.C. 74, 77 (1986).   Our examination of the surrounding facts

and circumstances leads us to conclude that ATC did not intend

that any portion of the $89,840 be allocated to personal physical

injury or physical sickness.

     On this record, we sustain respondent’s determination.

     We next consider whether petitioner is liable for an

addition to tax under section 6651(a)(1) and the accuracy-related
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penalty under section 6662(a).    Section 7491(c) places the burden

of production on respondent with respect to the liability of any

individual for any penalty, addition to tax, or additional amount

(penalties).   Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

To meet his burden of production, respondent must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.     Id.     The burden of proof remains on

the taxpayer with respect to issues such as reasonable cause or

substantial authority.   Id.

     Section 6651(a)(1) imposes an addition to tax for failure to

timely file a tax return, unless failure to do so is due to

reasonable cause and not willful neglect.       The taxpayer must

prove both reasonable cause and lack of willful neglect.        Crocker

v. Commissioner, 92 T.C. 899, 912 (1989).       “Reasonable cause”

requires the taxpayer to demonstrate that he exercised ordinary

business care and prudence.    United States v. Boyle, 469 U.S.

241, 246 (1985).   Willful neglect is defined as a “conscious,

intentional failure or reckless indifference.”        Id. at 245.

     Petitioner admitted that he did not file a tax return for

taxable year 1997 until January 1999, when he received

correspondence from respondent requesting that he file a tax

return for 1997.   Because petitioner did not file his 1997 tax

return until January 1999, respondent has satisfied his burden of

production with respect to the addition to tax under section
                               - 9 -

6651(a)(1).   Higbee v. Commissioner, supra at 447.       Petitioner

stated that he did not timely file a 1997 tax return because

taxes were withheld from the back wages portion of the settlement

payment.   However, the settlement agreement expressly provided

that some or all of the $89,840 may be taxable and that ATC would

issue a Form 1099 for that amount.

     Although on two occasions petitioner was treated for mental

illness, nothing in the record suggests that he was so

incapacitated during the period in issue as to render him

incapable of exercising ordinary business care and prudence.

Petitioner was hospitalized for diagnosis and treatment of his

mental illness for 10 days in early 1996.     Petitioner also was

hospitalized for mental illness for approximately 5 weeks in

2002.   There is no evidence that petitioner had any mental

problems during the intervening time period.     In fact, during

that time period, petitioner brought suit against ATC, admittedly

prepared the complaint, prepared a prearbitration memorandum,

conducted cross-examination, and negotiated a settlement of

$115,000 with ATC.   We conclude that petitioner is liable for the

addition to tax under section 6651(a)(1) for taxable year 1997.

     Section 6662(a) imposes a 20-percent penalty on the portion

of any underpayment of tax attributable to negligence or

disregard of rules or regulations.     Sec. 6662(b)(1).    Negligence

is any failure to make a reasonable attempt to comply with the
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provisions of the internal revenue laws.    Sec. 6662(c).

Moreover, negligence is the failure to exercise due care or

failure to do what a reasonable and prudent person would do under

the circumstances.    Neely v. Commissioner, 85 T.C. 934, 947

(1985).    Disregard includes any careless, reckless, or

intentional disregard of rules or regulations.    Sec. 6662(c);

sec. 1.6662-3(b)(2), Income Tax Regs.    No penalty will be imposed

with respect to any portion of any underpayment if it is shown

that there was a reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion.      Sec.

6664(c).

     For the same reasons that petitioner’s mental illness does

not excuse him from the addition to tax under section 6651(a)(1),

his mental illness does not excuse him from the accuracy-related

penalty under section 6662(a).    In addition, petitioner was on

notice by the settlement agreement and the Form 1099 issued by

ATC that some or all of the $89,840 was subject to tax.     Based

upon petitioner’s settlement discussions with ATC, there was no

reason for petitioner to believe that any of this amount was

excludable from his income.    Petitioner did not seek professional

advice as to whether any of the $89,840 was taxable and

intentionally omitted that amount from the income tax return he

filed at the request of the Internal Revenue Service.      Respondent

has satisfied his burden of production with respect to the
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accuracy-related penalty under section 6662(a).   Petitioner has

not shown reasonable cause for his failure to report the $89,840.

We conclude that petitioner is liable for the accuracy-related

penalty under section 6662(a) as determined by respondent.

     We have considered petitioner’s remaining arguments and

conclude that they are either irrelevant or without merit.



                                        Decision will be entered

                                   for respondent.
