                          T.C. Memo. 2007-45



                       UNITED STATES TAX COURT



               LAURA DENISE SEIDEL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24034-04.               Filed February 27, 2007.



     Laura D. Seidel, pro se.

     Jeremy L. McPherson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a $61,546 deficiency

in petitioner’s 2002 Federal income tax and a $1,528 addition to

tax pursuant to section 6654(a),1 as well as additions to tax




     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                              - 2 -

pursuant to section 6651(a)(1) and (2).    After concessions,2 the

issues for decision are (1) whether $157,0003 petitioner received

in connection with a settlement of a lawsuit is excludable from

gross income pursuant to section 104(a)(2), and (2) whether

petitioner is liable for an addition to tax pursuant to section

6654(a).

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time she filed the

petition, petitioner resided in Yuba City, California.




     2
        Respondent conceded the sec. 6651(a)(1) and (2) additions
to tax. Respondent also conceded that petitioner paid $10,835
for medical expenses, $6,129 for taxes, $18,911 for interest, and
$1,091 in charitable donations.
     3
        This amount equals settlement proceeds of $475,000 net of
petitioner’s attorney’s fees, litigation expenses, and the amount
paid to her as wages. In Commissioner v. Banks, 543 U.S. 426
(2005), decided over 10 months before trial in this case, the
Supreme Court held that as a general rule, when a litigant’s
recovery constitutes income, the portion of the recovery paid to
an attorney as a contingent fee is included in the litigant’s
income. At the beginning and the end of the trial, pursuant to
Rule 41(b) respondent orally moved to amend the pleadings to
conform to the evidence (i.e., to treat the entire settlement
proceeds of $475,000 as income). Generally we do not consider
issues that are raised for the first time at trial. See Foil v.
Commissioner, 92 T.C. 376, 418 (1989), affd. 920 F.2d 1196 (5th
Cir. 1990); Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).
Additionally, we denied respondent’s motion as it was prejudicial
to petitioner to allow respondent to amend the pleadings this
late. Respondent had sufficient time to amend the pleadings
before trial.
                                - 3 -

     In 1978, petitioner was hired by the California State

Automobile Association (now American Automobile Association, or

AAA).   She was employed as an insurance claims adjuster and a

bodily injury claims adjuster for more than 20 years.     Over the

years, her workload increased, causing her to feel overwhelmed.

Petitioner complained to her supervisors, but very little was

done to address her concerns.   As the employment relationship

deteriorated, and work-related stress mounted, petitioner sought

medical attention.

     In 1994, petitioner was diagnosed with Attention Deficit

Disorder (ADD) and Obsessive Compulsive Disorder (OCD).     In 1998,

petitioner was diagnosed with posttraumatic stress disorder.

These conditions were aggravated by the demands and workload of

petitioner’s position.   Again petitioner complained to her

supervisors and requested accommodations from her employer

regarding her condition.   These requests were not granted, and

petitioner eventually became totally unable to perform her work

functions.   Petitioner took a series of leaves of absence because

she was not able to work under these conditions.

     In 2001, petitioner filed a lawsuit against her employer

both in California State court and in the U.S. District Court for

the Eastern District of California.     In the District Court,

petitioner alleged three causes of action:     (1) Employment

discrimination on account of mental disability in violation of
                               - 4 -

the California Fair Employment and Housing Act (FEHA), Cal. Govt.

Code sec. 12940 (2000); (2) employment discrimination in

violation of the Americans with Disabilities Act (ADA), 42 U.S.C.

sec. 12101 (2000); and (3) a State law claim based upon the

failure to compensate for overtime in violation of California

State regulations.   In her California State court complaint,

petitioner alleged four causes of action (based upon the same

facts as the District Court case):     (1) Discrimination on the

basis of disability and failure to provide reasonable

accommodation for disability, FEHA, Cal. Govt. Code sec. 12940;

(2) failure to provide an environment free of harassment and

discrimination in employment, FEHA, Cal. Govt. Code sec. 12940;

(3) retaliation; and (4) alleged overtime violations on the part

of her employer.   In both lawsuits, petitioner prayed for damages

for the loss of wages, of earning capacity, and of benefits of

employment; general damages for emotional distress; incidental

and punitive damages; and reasonable attorney’s fees and costs.

     In March of 2002, petitioner and AAA entered into a

“Settlement Agreement and General Release of All Claims” that

settled all claims between petitioner and AAA (settlement

agreement).   The settlement agreement resolved the California

State court complaint and the District Court complaint.     The

settlement agreement provided payment to petitioner of the

following amounts:
                                - 5 -

Payable to petitioner with no           $157,000
  amounts withheld
Payable to petitioner as wages,           50,000
  with payroll tax withheld
Payable to petitioner’s attorneys        268,000
  for legal fees and costs with no
  amount withheld

Page 3 of the settlement agreement provided that petitioner

“acknowledges that she considers the payment of the check payable

to her without withholdings [the $157,000 payment] to be

compensation for personal injury (i.e. emotional distress)

damages only”.

      Respondent issued petitioner a notice of deficiency for 2002

determining that $157,000 of the settlement was not excludable

from her gross income pursuant to section 104(a)(2).

                              OPINION

I.   Deficiency

      A.   Burden of Proof

      Generally, the taxpayer bears the burden of proving the

Commissioner’s deficiency determinations incorrect.     Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).      Petitioner has

neither claimed nor shown that she satisfied the requirements of

section 7491(a) (to shift the burden of proof to respondent).

Accordingly, petitioner bears the burden of proof.     See Rule

142(a).
                                 - 6 -

     B.    Section 104

     It is well established that, pursuant to section 61(a),

gross income includes all income from whatever source derived

unless otherwise excluded by the Internal Revenue Code.     See

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-431 (1955).

Exclusions from gross income are construed narrowly.

Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995).

     The Small Business Job Protection Act of 1996 (SBJPA), Pub.

L. 104-188, sec. 1605, 110 Stat. 1838, amended section 104, as

relevant here, to provide:

     SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.

          (a) In General.--Except in the case of amounts
     attributable to (and not in excess of) deductions
     allowed under section 213 (relating to medical, etc.,
     expenses) for any prior taxable year, gross income does
     not include--

                   *     *   *    *      *    *    *

                (2) 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;

                   *     *   *    *      *    *    *

     * * * For purposes of paragraph (2), emotional distress
     shall not be treated as a physical injury or physical
     sickness. * * *

Section 104 as amended by the SBJPA generally is effective for

amounts received after August 20, 1996.      SBJPA sec. 1605(d), 110

Stat. 1839.
                                - 7 -

     “Damages received” mean amounts received “through

prosecution of a legal suit or action based upon tort or tort

type rights, or through a settlement agreement entered into in

lieu of such prosecution”.   Sec. 1.104-1(c), Income Tax Regs.     In

evaluating whether amounts received pursuant to the settlement

agreement are excludable from income pursuant to section

104(a)(2), we look to the written terms of the settlement

agreement to determine the origin and allocation of the

settlement proceeds.    See Metzger v. Commissioner, 88 T.C. 834

(1987), affd. without published opinion 845 F.2d 1013 (3d Cir.

1988); Jacobs v. Commissioner, T.C. Memo. 2000-59, affd. sub nom.

Connelly v. Commissioner, 22 Fed. Appx. 967 (10th Cir. 2001).

     Petitioner settled her claims against her former employer

before trial.    The parties entered into a written settlement

agreement.   The dispute between respondent and petitioner

revolves around the following language in the settlement

agreement:   “[Petitioner] acknowledges that she considers the

payment of the check payable to her without withholdings to be

compensation for personal injury (i.e. emotional distress)

damages only”.

     The parties agree that this sentence applies to the

$157,000 payment at issue.   Petitioner contends that this

language means that the settlement was compensation for personal

injuries including, but not limited to, emotional distress and
                                  - 8 -

that the abbreviation “i.e.” means “for example”.     Respondent

argues that the parenthetical phrase “personal injury (i.e.

emotional distress) damages only” is a limiting phrase and the

abbreviation “i.e.” means “that is”.

      “I.e.” is an abbreviation for the Latin phrase “id est”,

which means “that is” or “that is to say”.     Black’s Law

Dictionary 746 (6th ed. 1990).     Accordingly, we agree with

respondent that the parenthetical phrase in the settlement

agreement limits and defines the phrase “personal injury” to

mean emotional distress only.

      Furthermore, the settlement agreement does not contain

language indicating that any portion of the settlement was paid

for a physical injury or physical sickness.     Thus, even if the

Court were to accept petitioner’s reading of the settlement

agreement, there is no apportionment of any of the settlement

proceeds to a physical injury or physical sickness.

      Accordingly, we conclude that none of the settlement

proceeds of $157,000 is excluded from gross income.

II.   Addition to Tax

      A.   Burden of Production

      Section 7491(c) provides that the Commissioner bears the

burden of production with respect to the liability of any

individual for additions to tax.     “The Commissioner’s burden of

production under section 7491(c) is to produce evidence that it
                                    - 9 -

is appropriate to impose the relevant penalty, addition to tax,

or additional amount”.       Swain v. Commissioner, 118 T.C. 358, 363

(2002); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).         If a

taxpayer files a petition alleging some error in the

determination of an addition to tax, the taxpayer’s challenge

will succeed unless the Commissioner produces evidence that the

addition to tax is appropriate.        Swain v. Commissioner, supra at

363-365.

       Petitioner challenged the section 6654 addition to tax in

her petition.       Accordingly, respondent bears the burden of

production on this issue.

       B.     Section 6654

       Section 6654 provides for an addition to tax in the event of

an underpayment of a required installment of individual estimated

tax.       Sec. 6654(a) and (b).   Each required installment of

estimated tax is equal to 25 percent of the “required annual

payment”, which is equal to the lesser of (1) 90 percent of the

tax shown on the individual’s return for that year (or, if no

return is filed, 90 percent of his or her tax for such year), or

(2) if the individual filed a return for the immediately

preceding taxable year, 100 percent4 of the tax shown on that

return.       Sec. 6654(d)(1)(A) and (B)(i) and (ii).   “In order to


       4
        If the adjusted gross income shown on the return for the
preceding taxable year exceeds $150,000, 100 percent is replaced
with 112 percent for 2001. Sec. 6654(d)(1)(C)(i).
                              - 10 -

satisfy his burden of production under section 7491(c) regarding

petitioner’s liability for the section 6654 addition to tax,

respondent, at a minimum, must produce evidence necessary to

enable the Court to conclude that petitioner had a required

annual payment under section 6654(d)(1)(B).”   Wheeler v.

Commissioner, 127 T.C. 200, 211 (2006).

     Petitioner credibly testified that she filed a return for

2001.   Respondent, however, has not provided evidence of the

amount of tax shown on the 2001 return or that petitioner did not

file a return for 2001.   Without this information, we cannot

determine the amount of the “required annual payment”.

Therefore, respondent has not met his burden of production

regarding the section 6654 addition, and we conclude that

petitioner is not liable for this addition to tax.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and, to the extent not

mentioned above, we find them to be irrelevant or without merit.

     To reflect the foregoing,


                                               Decision will be

                                          entered under Rule 155.
