                              T.C. Memo. 2013-226



                         UNITED STATES TAX COURT



          JOSE B. MOLINA AND VIRNA N. MOLINA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20218-11.                         Filed September 23, 2013.



      Jose B. Molina and Virna N. Molina, pro sese.

      Wendy D. Gardner, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      WELLS, Judge: Respondent determined a deficiency of $155,402 in

petitioners’ Federal income tax for their 2007 tax year.1 During trial, respondent


      1
      Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended (Code) and in effect for the year in issue, and Rule
                                                                      (continued...)
                                        -2-

[*2] conceded that petitioners are entitled to a deduction pursuant to section

62(a)(20) for counsel’s fees of $56,179 and that petitioners are entitled to four

personal exemptions.2 After petitioners’ concessions,3 the only issue that we must


      1
       (...continued)
references are to the Tax Court Rules of Practice and Procedure. We round all
monetary amounts to the nearest dollar.
      2
       Remaining adjustments set forth by respondent in the notice of deficiency
depend on a Rule 155 computation, which we order below, and need not be
addressed in this opinion.
      3
        Petitioners contend that respondent denied them sufficient time to file their
petition because they did not receive the deficiency notice until two months after
respondent issued it. However, petitioners concede that they received a notice of
deficiency and timely filed a petition. Moreover, petitioners do not contend
specific harm caused by the alleged delay or alleged errors by respondent (e.g.,
that respondent did not send the notice of deficiency to petitioners’ last known
address). Because petitioners bear the burden of proof but have failed to set forth
clear and concise assignments of error or a clear and concise statement of facts,
this issue is deemed conceded. See Rules 142(a), 34(b)(4) and (5); Funk v.
Commissioner, 123 T.C. 213, 215 (2004); Jarvis v. Commissioner, 78 T.C. 646,
658 n.19 (1982).

       Petitioners also contend that respondent refused to allow them to be
represented by counsel, intimidated them against seeking counsel, misled them
regarding the status of their case and a past abatement, and failed to send them a
Letter 950. Generally, we will not look behind a notice of deficiency to examine
the evidence used, the propriety of the Commissioner’s motives, or administrative
policy or procedure used in making the determination. Cadwell v. Commissioner,
136 T.C. 38, 48-49 (2011), aff’d, 483 Fed. Appx. 847 (4th Cir. 2012); Greenberg’s
Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). Moreover, petitioners
did not stipulate facts, present admissible evidence, or otherwise address these
issues at trial or on brief. Accordingly, these issues are deemed conceded and we
                                                                        (continued...)
                                        -3-

[*3] decide is whether the $450,000 of proceeds petitioner Jose B. Molina

received in 2007 from the settlement of his lawsuit against his former employer

are excludable from petitioners’ gross income pursuant to section 104(a)(2).

                                  FINDINGS OF FACT

      Some of the facts and certain exhibits have been stipulated. The parties’

stipulations of facts are incorporated in this opinion by reference and are found

accordingly. Petitioners are husband and wife who resided in New Jersey at the

time they filed their petition.

      From 1980 until 2007, Mr. Molina was employed by the Clearing House

Payments Co., LLC (the Clearing House). Mr. Molina testified that, during 2004

and 2005, he began to suffer from “peptic ulcers, gastric problems, intestinal

problems, [and] stomach pain” as a result of being overworked because of the lack

of proper staffing and being racially discriminated against by supervisors at the

Clearing House. Medical tests administered to Mr. Molina were inconclusive as to

any viral infection or peptic ulcers. On July 29, 2005, Mr. Molina notified his

supervisors at the Clearing House of insufficient staffing in his department and its




      3
       (...continued)
do not address them further. See Rule 149(b); Cadwell v. Commissioner, 136 T.C.
at 49.
                                          -4-

[*4] potential detriment to employee morale and health. Mr. Molina never filed a

disability claim with the Clearing House or its disability insurance carrier.

      On May 1, 2007, Mr. Molina filed a complaint with the Superior Court of

New Jersey against the Clearing House. In the complaint Mr. Molina alleged,

inter alia, that the Clearing House and certain of its employees violated the New

Jersey Law Against Discrimination and the Conscientious Employee Protection

Act by creating a hostile work environment, discriminating against Mr. Molina

because of his race and nationality, and retaliating against Mr. Molina for

reporting the alleged discrimination. Mr. Molina also alleged in the complaint that

he was the victim of assault and of “serious and significant emotional and physical

distress”, but at trial he testified that he did not claim specific physical injuries in

the complaint. In his complaint Mr. Molina sought compensatory damages,

punitive damages, interest, costs of suit, attorney’s fees, and further relief as the

Superior Court of New Jersey saw fit. On May 20, 2007, Mr. Molina amended the

complaint to include an additional allegation under the Conscientious Employee

Protection Act. On or about June 27, 2007, Mr. Molina’s case was removed to the

U.S. District Court for the District of New Jersey.

      On July 10, 2007, Mr. Molina, represented by his counsel, Paul Weiner,

attended a mediation session with the Clearing House. At the conclusion of a
                                        -5-

[*5] mediation session, Mr. Molina and the Clearing House informally agreed to

settle Mr. Molina’s claims against the Clearing House. Before signing an informal

settlement document prepared by Mr. Weiner and representatives from the

Clearing House, Mr. Molina had an opportunity to review the terms of the

informal settlement document and discuss the terms with Mr. Weiner. Pursuant to

the terms of the informal settlement document, Mr. Molina and the Clearing House

agreed, inter alia, that Mr. Molina’s employment with the Clearing House was

terminated effective July 10, 2007, and that the Clearing House would pay Mr.

Molina a total of $700,000, split as follows: (1) $373,000, less applicable

withholding, within 10 calendar days of the effective date of a settlement

agreement; (2) $77,000 within 10 calendar days of the effective date of a

settlement agreement; and (3) $250,000, less applicable withholding, on January 2,

2008. The Clearing House attributed the $77,000 payment to attorney’s fees for

Mr. Molina’s counsel and the $373,000 and $250,000 payments to wages and

other taxable benefits for Mr. Molina. The Clearing House did not attribute any of

the payments to physical injuries, physical illness, or emotional distress.

      On July 24, 2007, Mr. Molina and the Clearing House formalized the terms

of the informal settlement document by executing the Confidential Settlement

Agreement and Release (settlement agreement). The settlement agreement did not
                                          -6-

[*6] allocate any specific payments from the Clearing House to Mr. Molina on

account of claims of physical sickness, physical injuries, physical distress, or

emotional distress. Mr. Molina also agreed to a general waiver and release of the

Clearing House and the other defendants “from and against any and all manner of

actions, causes of actions, suits, proceedings, [and] liabilities”.

      On July 24, 2007, Mr. Molina and the Clearing House entered a stipulation

of dismissal with the U.S. District Court for the District of New Jersey, and on

July 30, 2007, the District Court issued an order of dismissal.

      During 2007, Mr. Molina’s attorneys, acting on behalf of Mr. Molina,

received two payments from the Clearing House: a wire transfer of $260,988,

which was $373,000 less applicable withholdings, and $77,000. Mr. Molina’s

attorneys kept $44,800 of the $77,000 as attorney’s fees and transferred the

remaining $293,188 to Mr. Molina. During 2007, petitioners paid total attorney’s

fees of $56,179 in connection with Mr. Molina’s case against the Clearing House.

       The Clearing House sent Mr. Molina a Form W-2, Wage and Tax

Statement, that reported Mr. Molina received $483,535 of wage compensation

during 2007.4 The Clearing House also sent Mr. Molina a Form 1099-MISC,

      4
        Of Mr. Molina’s $483,535 of total wage compensation, $373,000 was
attributable to amounts received under the settlement agreement. The remaining
                                                                    (continued...)
                                        -7-

[*7] Miscellaneous Income, that reported Mr. Molina received $77,000 of

additional income during 2007. On their 2007 Federal income tax return,

petitioners reported wages of $534,5205 but did not report the additional income of

$77,000. On line 36 of their 2007 tax return, petitioners adjusted their gross

income by $450,000. On a statement attached to their 2007 tax return petitioners

stated that the $450,000 that Mr. Molina received pursuant to the settlement

agreement should be excluded from gross income pursuant to section 104(a)(2).

During May 2008, petitioners filed an amended tax return for their 2007 tax year,

in which they removed the line 36 adjustment of $450,000 and added on line 21

other income of $450,000 but maintained that the amount should be excluded

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

      Respondent sent and petitioners received a notice of deficiency dated June

7, 2011, determining that petitioners owed a deficiency of $155,402 for their 2007

tax year. On August 31, 2011, petitioners timely filed a petition in this Court.


      4
       (...continued)
portion of his total wage compensation was attributable to actual wages received
from the Clearing House before his termination on July 10, 2007, and is not at
issue.
      5
        Of the total wages of $534,520 petitioners reported, only $483,535 was
attributable to Mr. Molina. The remaining $50,985 was attributable to wages
earned by petitioner Virna N. Molina and reported to her on a Form W-2. Mrs.
Molina’s wages are not at issue.
                                         -8-

[*8] On September 27, 2012, Jeffrey Raskin, Mr. Molina’s medical doctor,

drafted a letter documenting some of Mr. Molina’s health concerns (Dr. Raskin’s

letter). Dr. Raskin’s letter indicated that he had provided medical care for Mr.

Molina for eight years, including a meeting on January 3, 2007, when Mr. Molina

reported multiple gastrointestinal symptoms. Dr. Raskin stated that at the time of

the meeting with Mr. Molina he believed that Mr. Molina’s symptoms “may have

been due to his stress at work.” Dr. Raskin was not available to testify at trial.

                                      OPINION

      As a general rule, the Commissioner’s determinations set forth in a notice of

deficiency are presumed correct, and the taxpayer bears the burden of proving

otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

      Gross income generally includes all income from whatever source derived.

Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). The

definition of gross income is broad in scope, while statutory exclusions from

income are narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328

(1995). Damages (other than punitive) received on account of personal physical

injuries or physical sickness may generally be excluded from gross income. Sec.

104(a)(2). The regulations provide that “[t]he term ‘damages’ * * * means an

amount received * * * through prosecution of a legal suit or action, or
                                         -9-

[*9] through a settlement agreement entered into in lieu of such prosecution.”

Sec. 1.104-1(c), Income Tax Regs. To exclude damages from gross income

pursuant to section 104(a)(2), the taxpayer must establish that (1) the underlying

cause of action is based upon tort or tort-type rights6 and (2) the damages were

received on account of personal injuries or sickness. Commissioner v. Schleier,

515 U.S. at 337.7

      Respondent concedes that petitioners have satisfied the first requirement for

exclusion, i.e., that the underlying cause of action for which the settlement

proceeds were paid was based upon tort or tort-type rights, because Mr. Molina



      6
       But see sec. 1.104-1(c), Income Tax Regs. (as amended by T.D. 9573,
2012-12 I.R.B. 498). However the parties do not raise this regulation and,
therefore, we do not address it.
      7
       When the Supreme Court issued its opinion in Commissioner v. Schleier,
515 U.S. 323 (1995), sec. 104(a)(2), as in effect for the year at issue in that case,
required, inter alia, that in order to be excluded from gross income an amount of
damages had to be received “on account of personal injuries or sickness”. After
the Supreme Court issued its opinion in Schleier, Congress amended (1996
amendment) sec. 104(a)(2), effective for amounts received after August 20, 1996,
by adding the requirement that, in order to be excluded from gross income, any
amount received must be on account of personal injuries that are physical or
sickness that is physical. Small Business Job Protection Act of 1996, Pub. L. No.
104-188, sec. 1605, 110 Stat. at 1838. The 1996 amendment does not otherwise
change the requirements of sec. 104(a)(2) or the analysis set forth in Schleier; it
imposes an additional requirement in order for an amount to qualify for exclusion
from gross income under that section. Hansen v. Commissioner, T.C. Memo.
2009-87, 2009 WL 1139469, at *5.
                                       - 10 -

[*10] sought to recover compensatory and punitive damages authorized by the

New Jersey Law Against Discrimination and the Conscientious Employee

Protection Act. Accordingly, we consider only the issue of whether the damages

were received on account of personal physical injuries or physical sickness.

      Where damages are received pursuant to a settlement agreement, the nature

of the claim that was the actual basis for settlement controls whether the damages

are excludable under section 104(a)(2). United States v. Burke, 504 U.S. 229, 237

(1992). Whether the settlement payment is excludable from gross income under

section 104(a)(2) depends upon the nature and the character of the claims asserted

and not upon the validity of those claims. See Bent v. Commissioner, 87 T.C. 236,

244 (1986), aff’d, 835 F.2d 67 (3d Cir. 1987); Church v. Commissioner, 80 T.C.

1104, 1106-1107 (1983). The crucial question is: “[I]n lieu of what was the

settlement amount paid?” Bagley v. Commissioner, 105 T.C. 396, 406 (1995),

aff’d, 121 F.3d 393 (8th Cir. 1997). To justify exclusion from income under

section 104, the taxpayer must show that his settlement proceeds were in lieu of

damages for physical injuries or physical sickness. See Green v. Commissioner,

507 F.3d 857, 867 (5th Cir. 2007), aff’g T.C. Memo. 2005-250; Bagley v.

Commissioner, 105 T.C. at 406. The determination of the nature of the underlying

claim is factual. Bagley v. Commissioner, 105 T.C. at 406; Robinson v.
                                         - 11 -

[*11] Commissioner, 102 T.C. 116, 126 (1994), aff’d in part, rev’d in part and

remanded on another issue, 70 F.3d 34 (5th Cir. 1995).

      Where there is a settlement agreement, the determination of the nature of the

claim is usually made by reference to the agreement. See Knuckles v.

Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), aff’g T.C. Memo. 1964-33;

Robinson v. Commissioner, 102 T.C. at 126. If the settlement agreement lacks an

express statement of what the amount paid pursuant to that agreement was to

settle, the intent of the payor is critical to that determination. Knuckles v.

Commissioner, 349 F.2d at 613; see also Agar v. Commissioner, 290 F.2d 283,

284 (2d Cir. 1961), aff’g per curiam T.C. Memo. 1960-21. Although the belief of

the payee is relevant to that inquiry, the character of the settlement payment hinges

ultimately on the dominant reason of the payor in making the payment. Agar v.

Commissioner, 290 F.2d at 284; Fono v. Commissioner, 79 T.C. 680, 696 (1982),

aff’d without published opinion, 749 F.2d 37 (9th Cir. 1984).

      The settlement agreement did not allocate any specific payments from the

Clearing House to Mr. Molina on account of claims of physical sickness, physical

injuries, physical distress, or emotional distress. Of the $450,000 to be paid to Mr.

Molina during 2007 pursuant to the settlement agreement, the Clearing House

attributed the $77,000 payment to attorney’s fees for Mr. Molina’s counsel and the
                                        - 12 -

[*12] $373,000 payment to wages and other taxable benefits for Mr. Molina. The

Clearing House did not attribute any of the 2007 payments to physical injuries,

physical illness, or emotional distress. Moreover, the settlement agreement did

include a statement of Mr. Molina’s consent to a general waiver and release of the

Clearing House and the other defendants “from and against any and all manner of

actions, causes of actions, suits, proceedings, [and] liabilities”. We have held that

the nature of underlying claims cannot be determined from a general release that is

broad and inclusive, see Connolly v. Commissioner, T.C. Memo. 2007-98, 2007

WL 1201543, at *3, and that all settlement proceeds are included in gross income

where there is a general release but no allocation of settlement proceeds among

various claims, see Evans v. Commissioner, T.C. Memo. 1980-142. Accordingly,

we conclude that petitioners have failed to prove that the Clearing House intended

to compensate Mr. Molina for his physical injuries or physical sickness, rather

than for a general release of various claims.

      Petitioners allege that Mr. Molina suffered from “peptic ulcers, gastric

problems, intestinal problems, [and] stomach pain” as a result of being

overworked because of the lack of proper staffing and being racially discriminated

against by supervisors at the Clearing House. Petitioners contend that the

payments from the Clearing House should be excluded from gross income
                                        - 13 -

[*13] pursuant to section 104(a)(2) because the payments were to compensate Mr.

Molina for physical sickness. Petitioners’ contention is without merit.

      Petitioners cite Domeny v. Commissioner, T.C. Memo. 2010-9, 2010 WL

114287, in support of their contention that payments may be excluded from

income if in satisfaction of a claim of stress-induced physical sickness. We

believe that petitioners’ reliance on Domeny is mistaken. In Domeny, the

settlement agreement was silent as to the payor’s intent but still allocated

payments as wage compensation, attorney’s fees, and nonemployee compensation.

Id., 2010 WL 114287, at *4. The Court concluded that the taxpayer offered

credible evidence proving that she was physically ill and that she informed her

employer of that fact, and held that the differing treatment of the three types of

payments and the negotiations between the taxpayer and the employer suggested

that at least a portion of the taxpayer’s recovery was attributable to that physical

illness. Id.

      In contrast, petitioners have not offered credible evidence establishing that

Mr. Molina was physically ill or that Mr. Molina even informed the Clearing

House of his alleged physical illness,8 the settlement agreement does not allocate

      8
       At trial, petitioners offered Dr. Raskin’s letter as evidence that Mr. Molina
suffered gastrointestinal symptoms as a result of stress at work. However, Dr.
                                                                         (continued...)
                                         - 14 -

[*14] payments to specific claims, and the Clearing House clearly intended for all

of the payments to be wage compensation and attorney’s fees. Moreover, Mr.

Molina’s complaint itself only mentioned a claim for “serious and significant

emotional and physical distress”9 without elaborating specific physical injuries or


      8
        (...continued)
Rakin’s letter (1) was not admitted as evidence at trial, (2) was not considered by
the Internal Revenue Service Office of Appeals, and (3) was not
contemporaneously drafted at the time of the alleged physical symptoms but rather
just days before trial. Additionally, Dr. Raskin was unable to testify at trial to
verify the contents of the letter or to give testimony. Lab tests and other medical
examinations ordered by Dr. Raskin were inconclusive as to any physical injuries
or physical sickness, and Mr. Molina never filed a disability claim with the
Clearing House or its disability insurance carrier. Therefore, the only evidence to
support petitioners’ claims of physical sickness and physical injuries is Mr.
Molina’s self-serving testimony, which we do not deem credible in the light of the
foregoing.
      9
        Although petitioners do not in their petition or brief explicitly claim that
proceeds from the settlement agreement were in satisfaction of Mr. Molina’s
claims for emotional distress, emotional distress is a listed claim in Mr. Molina’s
complaint. However, sec. 104(a) provides that emotional distress is not to be
treated as a physical injury or physical sickness for purposes of excluding damages
from gross income pursuant to sec. 104(a)(2), except for damages not in excess of
the amount paid for medical care attributable to emotional distress. See
Blackwood v. Commissioner, T.C. Memo. 2012-190, 2012 WL 2848677, at *5;
see also Hansen v. Commissioner, T.C. Memo. 2009-87. Additionally, the
legislative history of the 1996 amendment states: “[I]t is intended that the term
emotional distress includes symptoms (e.g., insomnia, headaches, stomach
disorders) which may result from such emotional distress.” H.R. Conf. Rept. No.
104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041. Because petitioners have
not alleged that Mr. Molina incurred medical costs or offered evidence in support
thereof, we conclude that no portion of the proceeds paid to Mr. Molina under the
                                                                          (continued...)
                                        - 15 -

[*15] sickness. Neither the complaint nor the amended complaint ever connected

Mr. Molina’s alleged gastrointestinal problems with his claims for damages, which

were based almost entirely on discrimination and retaliation. At trial, Mr. Molina

admitted that he did not claim specific physical injuries or sickness in the

complaint. Considering the facts that (1) the complaint placed little emphasis on

Mr. Molina’s physical sickness, (2) the settlement agreement did not allocate any

amounts specifically to physical sickness, and (3) the Clearing House did not

intend for the payments to be in satisfaction of claims of physical sickness, we

conclude that petitioners have failed to prove that any portion of the payments

received under the settlement agreement was to compensate Mr. Molina for

physical sickness.

      Petitioners also contend that Mr. Molina did not have an opportunity to

have the allocation of payments set forth in the settlement agreement altered

before signing it. Mr. Molina testified that he was under the impression that the

allocations (or lack thereof) set forth in the settlement agreement were mandated

by the Internal Revenue Service and that he would not be taxed on those

payments. We decline to address petitioners’ contentions because we find Mr.

      9
       (...continued)
settlement agreement may be excluded from gross income pursuant to sec.
104(a)(2) on account of emotional distress.
                                       - 16 -

[*16] Molina’s testimony to be less than credible. A representative of the Clearing

House who was present at the mediation where Mr. Molina and the Clearing

House agreed to the terms of the settlement testified that both parties negotiated

the terms of the settlement agreement at that mediation session and that Mr.

Molina was represented by Mr. Weiner, his attorney, throughout the negotiation of

those terms. Additionally, in an email communication to petitioner after the

mediation session, Mr. Weiner stated that neither Mr. Weiner nor the Clearing

House representatives told Mr. Molina that the allocations were unalterable or

taxable. Instead, Mr. Weiner advised Mr. Molina that he was not a tax attorney

and could not give Mr. Molina tax advice regarding the settlement proceeds and

that Mr. Molina should confer with a tax professional. Accordingly, petitioners

have not proved that Mr. Molina did not have an opportunity to have the payments

set forth in the settlement agreement allocated.

      On the basis of the foregoing, we conclude that petitioners have failed to

prove that any portion of the payments received under the settlement agreement

was to compensate Mr. Molina for personal physical injuries or physical sickness.

Consequently, we hold that Mr. Molina’s proceeds of $450,000 pursuant to the

settlement agreement are not excludable from petitioners’ 2007 gross income

pursuant to section 104(a)(2). However, as stated above, respondent concedes that
                                       - 17 -

[*17] petitioners are allowed a fourth personal exemption and a deduction of

$56,179 for counsel’s fees.

      In reaching these holdings, we have considered all the parties’ arguments,

and, to the extent not addressed herein, we conclude that they are moot, irrelevant,

or without merit.

      To reflect the foregoing,


                                                Decision will be entered under

                                        Rule 155.
