                                Carl J. FABRY, Patricia P. Fabry, Petitioners,
                                                       v.

                       COMMISSIONER OF INTERNAL REVENUE, Respondent.

                                                No. 99-12407.
                                       United States Court of Appeals,

                                               Eleventh Circuit.
                                                Aug. 21, 2000.

Appeal from a Decision of the United States Tax Court. (No. 96-09126).

Before DUBINA, BLACK and HILL, Circuit Judges.
        HILL, Circuit Judge:

        This tax case presents a single issue: are damages to business reputation received in the amount of

$500,000 by taxpayers in 19921 in settlement of their tort action for strict liability and negligence against the

manufacturer of an allegedly defective product properly excludable from gross income under Internal

Revenue Code (IRC) § 104(a)(2) as "damages received ... on account of personal injuries"? Under a de novo

review, based upon the following, the answer to this question is yes. The decision of the tax court is reversed.

                                       I. FACTUAL BACKGROUND
        The relevant facts are straightforward and undisputed. From 1976 to 1988, taxpayers Patsy and Carl
Fabry were the successful operators of an unincorporated sole proprietorship known as Patsy's Nursery in

Orange County, Florida near Orlando. They specialized in raising ornamental plants2 and citrus trees. During
this period of time, the nursery and the Fabry's reputation in the agricultural industry prospered. Their

business grew to become that of a large-scale commercial supplier.
        Good times and the Fabrys' good name suffered change in 1988 when the Fabrys began to use a



    1
      Since 1996, this question does not arise. IRC § 104(a)(2) was amended by the Small Business Job
Protection Act of 1996. The amendment provides that damages received on account of a non-physical
injury (e.g., age discrimination and injury to reputation) are not excludable from gross income. This
restriction on the exclusion from income of non-physical damages, however, is generally effective for
amounts received after August 20, 1996, but does not apply to amounts received under any written
binding agreement, court decree, or mediation award in effect on, or issued on or before, September 13,
1995. P.L. 104-188. The amended section does not apply here.
    2
     The ornamental plants were wax plants, Hoya Carnosa. Due to the high quality and vivid color of
the wax plants, Patsy Fabry became known in the nursery business as the "Hoya Lady." Her success did
not go unnoticed. Research papers were written by representatives of the University of Florida's Institute
of Food and Agricultural Science on growing processes used by the Fabrys.
chemical fungicide manufactured by E.I. du Pont de Nemours and Co. (du Pont) on their plants.3 Upon using

this fungicide, their plants began to yellow, leaves were distorted, growth was stunted. Many plants died.
Over the next three years, the Fabrys suffered extensive damage to their nursery stock, eventually causing

them to default on contracts under which they were obligated to deliver healthy plants. Then, when

previously sold plants developed defects, alleged to be fungicide-related, the death knell struck. The Fabrys'

reputation as respected business persons with expertise in the production and supply of quality plants was
gone.4 They closed the nursery in 1991.
                                    II. PROCEDURAL BACKGROUND

A.       State Court Action

         The Fabrys sued du Pont in state court seeking monetary damages under tort theories of negligence

and strict liability. Their complaint averred that the fungicide they had used in the nursery was contaminated
and that the contamination caused damage to their plants. They sought damages for lost profits, lost going
concern value and damage to their business reputation.5
         Settlement discussions commenced almost immediately. Part of the Fabry's initial settlement demand
included in part a claim for $500,000 for damages to their business reputation. The lawsuit was resolved

through mediation in 1992. Du Pont paid taxpayers $3.8 million in exchange for a full release of the claims
asserted in the suit. In their general release, the taxpayers released du Pont from all claims relating to their

use of its fungicide in their nursery between 1988 and 1991, except, among other things, for claims for
damages to crops planted in the future. Thereafter, the Fabrys filed a notice of voluntary dismissal with
prejudice.

B.       The Federal Court Action



     3
     Even the field notes of a du Pont representative admit that the Fabrys had established a premier citrus
nursery using state of the art operations.
     4
     The record very clearly reflects how the Fabrys' sole proprietorship and their good name were
synonymous, inextricably intertwined. The fungicide contamination had a devastating impact on both.
When the Fabrys sold a plant or a tree, their name was on it. Long-term customers felt that they could not
depend on them anymore and the Fabrys' word was viewed by the closely-knit agricultural community as
"no good." They lost friends and withdrew from trade organizations due to the embarrassment they
suffered. In 1996, Mr. Fabry underwent open heart surgery.
     5
     The Fabrys claimed in their first amended complaint that they had "sustained damages in the form of
the lost value of destroyed or injured plants, damage to their business reputation, lost income and lost
value for their business...."
         On their 1992 joint federal income tax return, the Fabrys did not include in gross income the

$500,000 received in settlement of their tort action against du Pont attributable to damage to their business
reputation. Their rationale was that, acting in good faith, they had substantial authority and reasonable

grounds for their position that the $500,000 was not taxable income under IRC § 104(a)(2). The

Commissioner of the Internal Revenue Service (Commissioner) disagreed, asserting against the taxpayers a
tax deficiency of $201,054, plus an accuracy penalty of $40,211. The Fabrys petitioned the tax court for a

redetermination of both the deficiency and the penalty.

         Following trial, the tax court, using a facts and circumstance approach, found in favor of the

Commissioner.6 A final 1992 income tax deficiency against the taxpayers was computed to be $200,192, with

a penalty of $7,088. This appeal follows.
                                       III. STANDARD OF REVIEW
         The interpretation and application by the tax court of a statutory section of the Internal Revenue

Code is a question of law which we review de novo. Atlanta Athletic Club v. Commissioner, 980 F.2d 1409,

1412 (11th Cir.1993); Gold Kist v. Commissioner, 110 F.3d 769, 771 (11th Cir.1997).

                                               IV. ANALYSIS

A.       The Statute-Damages Received for Personal Injuries or Sickness Prior to August 21, 19967

         The definition of gross income under the IRC sweeps broadly. Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 75 S.Ct. 473, 475, 99 L.Ed. 483 (1955). Section 61(a) provides that "gross income means

all income from whatever source derived," subject only to the exclusions specifically enumerated elsewhere
in the Code. IRC § 61(a). The settlement award in this case constitutes gross income unless it is expressly

excepted by another provision. Exclusions from income are narrowly construed. See United States v.

Centennial Sav. Bank FSB, 499 U.S. 573, 111 S.Ct. 1512, 1519, 113 L.Ed.2d 608 (1991).

         For our purposes here, section 104(a)(2) provides that damages received pursuant to a judgment or

settlement (whether as lump sums or as periodic payments) on account of personal injuries or sickness were

     6
      See also Henry v. Commissioner, 77 T.C.M. (CCH) 2209 (1999)(where, relying upon its opinion in
this case, Fabry v. Commissioner, 111 T.C. 305 (1998), the tax court found that the $1,623,203 payment
received in 1994 by the taxpayer, 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 application of its chemical fungicide on his orchids, was not made "on account of
personal injuries" within the meaning of IRC § 104(c)(2) and was includable in gross income for income
tax purposes).
     7
     See note 1 supra.
excludable from gross income. IRC § 104(a)(2). However, neither the statute nor its legislative history offer

any explanation of the term "personal injuries."8 See United States v. Burke, 504 U.S. 229, 112 S.Ct. 1867,

119 L.Ed.2d 34 (1992). The regulations, however, in defining the term "damages" equate the term "personal

injury" to a violation of tort or tort type rights.9 Regs. § 1.104-1(c).

B.         Inconsistent Case Law Prior to 199210
           During this period of time, yet prior to the first of three Supreme Court decisions beginning in 199211,

neither the courts nor the Internal Revenue Service (IRS) appear to have been able to reach a firm consensus
as to what constituted a personal injury. Significant to this case, during the 1980's, there was considerable

disagreement and controversy as to whether the term "personal injuries or sickness" encompassed injury to

reputation, and if it did, whether that included injury to business reputation.12

           In Roemer v. Commissioner, 79 T.C. 398 (1982), rev'd 716 F.2d 693 (9th Cir.1983), the taxpayer was




     8
     Black's Law Dictionary 790 (7th ed.1999) defines personal injury to include both physical and
non-physical injury: "Torts. 1. In a negligence action, any harm caused to a person, such as a broken
bone, a cut, or a bruise; bodily injury. 2. Any invasion of a personal right, including mental suffering and
false imprisonment."
     9
     "The term 'damages received (whether by suit or agreement)' means an amount received (other than
workmen's compensation) 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." Regs. § 1.104-1(c).
     10
       Given the foregoing state of circumstances at the time of the settlement transaction here under
investigation, we seek in vain if we seek for precedential clarity. Nevertheless, we must embark on the
trip to the best conclusion available. Our voyage is upon dimly lit waters, shrouded in fog, marked, if at
all, by barely discernable lights and barely audible bell buoys, some on one side and others on the
opposite side of the channel we seek to navigate. If we succeed in reaching the right destination it will
have involved some unavoidable encounters with shoals, sand bars and shell banks, but we hope, the
watertight integrity of the vessel will have survived.
     11
         See Part IV.C infra.
     12
       See Threlkeld v. Commissioner, 87 T.C. 1294 (1986), aff'd 848 F.2d 81 (6th Cir.1988) (where the
tax court found, as to amounts received by taxpayer in settlement of his malicious prosecution suit, that
there was no valid distinction between damages received for injury to personal reputation and damages
received for injury to business reputation); Rev. Rul. 85-98, 1985-2 C.B. 51 (I.R.S.1985) (recoveries for
injury to personal reputation are excludable but recoveries for injury to business reputation are not);
Church v. Commissioner, 80 T.C. 1104 (1983) (where recoveries for injury to personal reputation found
excludable in tort action involving libel by elected state attorney general against newspaper; the fact that
he was a public figure compounded the pain); Roemer v. Commissioner, 716 F.2d 693 (9th Cir.1983),
rev'g 79 T.C. 398 (1982) (discussed at Part IV.B. infra, where recoveries for injury to business reputation
in tort action involving libel by licensed insurance broker against credit bureau for filing false credit
report found excludable).
a licensed insurance broker who filed a libel suit against a credit bureau for publishing a false credit report.13
The tax court found that there was a distinction between an injury to personal reputation and an injury to

business reputation. Only the former was excludable under IRC § 104(a)(2). The Ninth Circuit reversed.

It looked to the nature of the tort of defamation under California law and concluded that the Roemer

defamation resulted in a personal injury. The court noted that injury to personal reputation by a defamatory

attack should not be confused with its derivatory consequences, i.e., loss of income or loss of standing in the

community. As all harm flowed from the same personal attack, all compensatory damages were held

excludable, whether personal or professional. Id. at 700-01; see Rev Rul 85-143, 1985-2 C.B. 55

(I.R.S.1985) (where the IRS stated that it would not follow the Ninth Circuit's opinion in Roemer ).

          Then, in 1988, case law came full circle when the tax court and the Sixth Circuit appeared to put the

issue of distinction between an injury to personal reputation and an injury to business reputation to rest. In

Threlkeld v. Commissioner, 87 T.C. 1294 (1986), aff'd 848 F.2d 81 (6th Cir.1988), taxpayer settled a tort

action for malicious prosecution, arising out an earlier real estate contract rescission action. The tax court

recognized, and the Sixth Circuit agreed, that unreasonable distinctions between an injury to personal

reputation and an injury to professional reputation had been made in the past. Id. at 83. Following the Ninth

Circuit's reasoning in Roemer, the Sixth Circuit stated:

          We agree with the Ninth ... Circuit[ ] that the nonpersonal consequences of a personal injury, such
          as a loss of future income are often the most persuasive means of proving the extent of the injury that
          was suffered, and that the personal nature of an injury should not be defined by its effect. Injury to
          a person's hand or arm is a personal injury. This is so even though it may affect a person's
          professional pursuits.

Id. at 84. The Sixth Circuit held that because the injury to the taxpayer's reputation was a personal injury,

although it affected his professional pursuits, all income in compensation of the injury was excludable under

IRC § 104(a)(2). Id.

C.        The Supreme Court Decisions, Beginning in 1992

          Finally, in three decisions, two of which are pertinent here, the Supreme Court provided some




     13
      The Roemer complaint alleged that the publication was made "with intent to damage his reputation,
and to injure him in his business profession and occupation." Roemer, 716 F.2d at 695. The jury,
instructed to consider both injury to personal reputation and injury to business reputation in reaching a
verdict, awarded the taxpayer both compensatory damages and punitive damages. Id. Claiming that the
damages were inextricably combined, the taxpayer excluded all compensatory damages, personal and
professional alike, from his gross income. Id.
definitive guidance as to how IRC § 104(a)(2) should be interpreted.14 In 1992, the Court would essentially

define what constituted a "personal injury" under the statute by examining the concept of tort in United States

v. Burke, 504 U.S. 229, 112 S.Ct. 1867, 119 L.Ed.2d 34(1992). In Commissioner v. Schleier, 515 U.S. 323,

115 S.Ct. 2159, 132 L.Ed.2d 294 (1995), the Court would set forth a two-prong test for excludability,

discussed below: (1) that the wrong complained of must constitute a personal injury, and, (2) that damages

received must have been received on account of such personal injury.

1.        The Burke Decision

          The Burke case involved whether back pay received by the taxpayer in settlement of her sex

discrimination claim against the Tennessee Valley Authority (TVA) under Title VII was excludable under

IRC § 104(a)(2) as "damages received ... on account of personal injuries." Burke, 112 S.Ct. at 1868. In order

to qualify for the exclusion, the Court found that the taxpayer must show that Title VII, the legal basis of her

recovery for back pay, redressed a tort-like personal injury, stating further that:
                   For example, the victim of a physical injury may be permitted, under the relevant state law,
          to recover damages not only for lost wages, medical expenses, and diminished future earning
          capacity on account of the injury, but also for emotional distress and pain and suffering. (citations
          omitted). Similarly, the victim of a "dignitary" or non-physical tort such as defamation may recover
          not only for any actual pecuniary loss (e.g., loss of business or customers), but for "impairment of
          reputation and standing in the community, personal humiliation, and mental anguish and suffering."
          (citations omitted).

Id. at 1871-72. The Burke Court concluded that nothing in the remedial scheme of Title VII compensated

the taxpayer for the traditional harms associated with personal injury, i.e., pain and suffering, emotional

distress, harm to reputation or other consequential damages.15 Id. at 1874.

2.        The Schleier Decision

          The Schleier case involved whether back pay and liquidated damages received by the taxpayer, a

terminated sixty-year old airline pilot, in settlement of his age discrimination claim against United Airlines

under the Age Discrimination in Employment Act of 1967 (ADEA) was excludable from gross income under
IRC § 104(a)(2). The Court found that under the plain language of IRC § 104(a)(2), the text of its applicable


     14
      In O'Gilvie v. United States, 519 U.S. 79, 117 S.Ct. 452, 136 L.Ed.2d 454 (1996), discussed at note
25 infra, the Court found that punitive damages were not excludable under IRC § 104(a)(2).
     15
       The Burke analysis was remedy-driven. It examined the remedial scheme of the underlying law or
statute to determine whether the injury claimed to have been suffered by the taxpayer was a tort or
tort-like injury. Burke, 112 S.Ct. at 1873. A personal injury was suffered only if the law giving rise to
the claim provided redress for pecuniary loss and redress for intangible loss such as pain and suffering,
emotional distress, and loss of reputation. Id.
regulation, and its decision in Burke, a taxpayer must meet two independent requirements before a recovery

may be excluded under IRC § 104(a)(2). Schleier, 115 S.Ct. at 2167. "First, the taxpayer must demonstrate

that the underlying cause of action giving rise to the recovery is based upon tort or tort type rights; and

second, the taxpayer must show that the damages were received on account of personal injuries or sickness."16

Id.

           The Schleier taxpayer met neither requirement. As to the first prong, the Court concluded that

recovery under the ADEA was not "based upon tort or tort type rights." As to the second prong, while the

taxpayer's recovery of back wages appeared at first glance to be comparable to an automobile accident

victim's recovery of lost wages, it did not satisfy the critical requirement of being "on account of a personal

injury or sickness." Id. at 2167. Even if the proximate cause of taxpayer's loss of income was his discharge

due to advanced age or the celebration of his sixtieth birthday, neither event can fairly be described as a

"personal injury" or "sickness." Id. And although, the Court said, his unlawful termination may have caused

him some pain, suffering and emotional distress such as that suffered by an automobile accident victim, no

personal injury had been suffered affecting the amount of back wages recovered. Id.

3.         Case Law after Burke and Schleier
           While these two cases set forth the two requirements we must meet in order to qualify for a IRC §

104(a)(2) exclusion, they stop short of the precise issue before us. Burke holds that payment received because

of a Title VII violation is not excludable because violation of Title VII does not provide for personal injury

losses. Schleier holds that the consequences of reaching sixty years of age are not consequences of personal




      16
       While the Schleier Court's articulation of the second prong has not been found to be a model of
clarity, it used a hypothetical example to illustrate the usual meaning of the phrase "on account of
personal injuries." A taxpayer injured in an automobile accident, the Court stated, suffers medical
expenses, lost wages, and pain, suffering and emotional distress that cannot be measured with precision.
Schleier, 115 S.Ct. at 2163-64. If the taxpayer settles the resulting lawsuit for $30,000, the entire amount
would be excludable under IRC § 104(a)(2). The medical expenses and compensation for pain, suffering
and emotion distress clearly constitute damages received "on account of personal injuries." Id. Recovery
for lost wages, the Court stated, is also excludable as being "on account of personal injuries" as long as
the wages resulted from the time in which the taxpayer was out of work due to her automobile injuries.
Id. The critical point this hypothetical illustrates, the Supreme Court concluded, is that each element of
the settlement is recoverable not simply because the taxpayer received a tort settlement but because each
element of the settlement satisfies the requirement set forth in IRC § 104(a)(2) that the damages were
received "on account of personal injuries or sickness." Id. This requirement employs a causal
analysis—that is, a causal link must exist between the personal injury and the damages received. The
Schleier majority, however, did not explain exactly what the link was nor how close the link must be for a
recovery to qualify for a IRC § 104(a)(2) exclusion.
injury.17 We must look elsewhere for guidance.

         Although the few courts after Schleier that have examined the second prong have failed to shed much

light on its interpretation, we find helpful the recent decision by the Sixth Circuit, in Greer v. United States,

207 F.3d 322 (6th Cir.2000). In Greer, the taxpayer, an environmental compliance director, was abruptly

terminated by his employer, Ashland Oil, under circumstances he claimed were highly suspicious. A normal

severance package for an Ashland Oil employee of taxpayer's caliber and years of service would have totaled
$51,000. Taxpayer received $331, 968. He claims the extra portion constituted settlement of his potential

wrongful discharge claim and was excludable from gross income. Id. at 325. He asserted that the

circumstances of his termination diminished his personal and professional reputation and inflicted stress,

humiliation, mental anguish, self doubt and emotional pain upon him. Id. The district court agreed and

granted the taxpayer's motion for summary judgment.

         Upon the government's appeal, the Sixth Circuit held that Schleier's two part test "tightly packs a

number of discrete elements." Id. at 327, 115 S.Ct. 2159. It found it useful to disaggregate the test into four

disparate elements. Id. To satisfy Schleier, the Sixth Circuit found that:

         ... the taxpayer must show that (1) there was an underlying claim sounding in tort; (2) the claim
         existed at the time of settlement; (3) the claim encompassed personal injuries; and (4) the
         agreement was executed "in lieu" of the prosecution of the tort claim and "on account of" the
         personal injury, rendering it a settlement rather than a mere severance agreement. By requiring each
         of these elements, courts can effectively distinguish between severance and settlement agreements
         and prevent parties from "creating contrived 'settlement agreements' to avoid taxation of [severance]
         proceeds." (citation omitted).

Id. (emphasis added).

         Turning to the third disparate element, which is also applicable here, the Sixth Circuit stated:
                  Third, we find that Greer's tort claim potentially involved injuries that were personal. Courts
         and the IRS have long recognized that § 104(a)(2)'s reference to personal injuries "encompasses ...
         nonphysical injuries to the individual, such as those affecting emotions, reputation, or character....
         " Burke, 504 U.S. at 235 n. 6, 112 S.Ct. 1867, 119 L.Ed.2d 34. See also Schleier, 515 U.S. at 329
         & n. 4, 115 S.Ct. 2159, 132 L.Ed.2d 294 (stating that § 104(a)(2) covers "intangible as well as
         tangible harms"). Specifically, personal injuries include emotional distress, see Burke, 504 U.S. at
         235 n. 6, 112 S.Ct. 1867, 119 L.Ed.2d 34, mental pain and suffering, see Bent v. Commissioner, 835
         F.2d 67, 70 (3d Cir.1987), and injury to personal and professional reputation. See Threlkeld v.
         Commissioner, 848 F.2d 81, 83-84 (6th Cir.1988); Church v. Commissioner, 80 T.C. 1104, 1109
         (1983). Here, Greer's tort claim sufficiently encompasses personal injury. Specifically Greer claims
         injuries to his personal and professional reputation, as well as distress, humiliation, and mental
         anguish. These claims of non-physical injury fall within the broad ambit of § 104(a)(2) "personal"


    17
      As discussed in detail in note 16 supra, the Schleier Court used a hypothetical automobile wreck
with bodily injury to illustrate personal injury. It is beyond dispute that bodily injury is included in
personal injury. The Schleier Court was not required to deal with damaged reputation; it dealt only with
birthdays and ADEA recoveries.
          injuries.

Id. at 328, 115 S.Ct. 2159 (emphasis added).18

          We agree with the Sixth Circuit in Greer that after Schleier, claims of non-physical injury can still

be proven to be excludable.

          Furthermore, in Noel v. Commissioner, 73 T.C.M. (CCH) 2178 (1997), the Tax Court held that

two-thirds of the settlement proceeds were allocated to the release of taxpayer's claims in contract. The

remaining one-third was allocated to tortious interference with contractual rights and prospective business

advantages. As the interference caused emotional distress and damage to business reputation through adverse

publicity in the press, it was paid "on account of personal injury" and excludable from gross income under

IRC § 104(a)(2). See also Knevelbaard v. Commissioner, 74 T.C.M. (CCH) 161, 168 (1997) (where

settlement proceeds paid to dairy farmers by various bank defendants, caused by the banks' violation of duties

owed, were held to be excludable as they were made "not for the value of milk, but for the value ... of the

emotional distress claims asserted"); Banks v. United States, 81 F.3d 874 (9th Cir.1996) (as claim for breach

of duty of fair representation was "tort-like" due to available remedies and received from union "on account

of personal injury," recovery was excludable); but see Gregg v. Commissioner, 77 T.C.M. (CCH) 1215

(1999)(distinguishing Noel, where the court found that the taxpayer failed to prove that damages awarded on

his claim for interference with a business relationship was received on account of personal injuries).19

D.        The Present Case20

1.        The Tax Court Opinion
          The IRS stipulated at trial that the $500,000 payment was properly allocable as damage to the Fabry's




     18
      With this said, nonetheless, the Sixth Circuit found that summary judgment was an inappropriate
vehicle as there remained a dispute as to whether the agreement was "on account of" personal injury and
remanded to the district court for this factual determination. Greer, 207 F.3d at 328.
     19
      The appeal of this case is currently pending in our court.
     20
      Taxpayer's counsel asserts throughout his brief that an unbroken line of cases hold as a matter of
law, that damage to business reputation is a personal injury. Thus counselled, we approached our task as
any easy one; we should just follow this unbroken line of cases. We have been disappointed twofold:
We do not find an unbroken line, as this was a mischaracterization, and we were not as sincerely
counselled as we should have been by an officer of the court.
business reputation.21 The tax court acknowledged during trial that the case presented a single question of

law. Yet, in its opinion disallowing the exclusion under IRC § 104(a)(2), the tax court used a facts and
circumstance approach, focusing only on the nature of the Fabrys' claims against du Pont.

         The tax court first examined the terms of the Fabrys' release with du Pont and its supporting

documents. It found specific language lacking to allow it to conclude that the $500,000 payment was

received "on account of" personal injuries.
         Next the tax court turned to language found in the Fabrys' first amended complaint for damages and

demand for jury trial. Again, it found specific language lacking, as nowhere in the complaint did the Fabrys
use the term "personal injuries" to describe the injuries suffered as the result of their use of the du Pont

fungicide.

         Finally the tax court examined the mediation process preceding settlement, as well as the settlement
negotiations themselves and their supporting documents (statements, expert reports, and counsel
correspondence).22 Again it found that no claim for personal injury had been settled by the Fabrys with du
Pont.

         Based upon this examination of the record, the tax court found that there was insufficient evidence
of a claim for personal injury presented during the lawsuit sufficient to support a conclusion that the Fabrys'
$500,000 claim for damages to business reputation was "on account of personal injuries." It then disallowed

the exclusion under IRC § 104(a)(2).
         We disagree. The facts and circumstance approach used by the tax court is insufficient.23 Its method


    21
      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 reputation; (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 reputation 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 reputation.
    22
       The tax court admits two instances where the Fabrys did assert personal injury in those exact words.
The first was in a letter to a private claims adjuster hired by du Pont before commencement of the lawsuit,
in which the Fabrys described their loss of friends who were also customers and their belief that they
appeared as "lying, deceiving fools to our customers." The second was in a mediation summary letter by
the Fabrys' attorney which asserted that the personal injury exception to the stipulation of the parties
applied only to physical personal injury. Neither impressed the tax court, however, as the first predated
the filing of the complaint and the second postdated the execution of the release.
    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, 10 (1992), it is only one factor. Intent of
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.24

2.        Intangible Injuries Such as Damage to Business Reputation in Light of Schleier and Cases Following
          Schleier25
          Based upon the previous discussion, therefore, in order to satisfy Schleier and qualify for the

exclusion, it appears that a cause and effect relationship must be established between the tort, the personal
injury resulting, and the amount received in settlement. In a non-physical personal injury case therefore, each

element of the tort settlement must be examined to determine whether there is a direct causal link between

such element and an intangible element of the injury (i.e., emotional distress, pain and suffering, loss of

reputation, etc.). If such a link is found, it would seem to satisfy Schleier and payments received for such

damage, including losses of earning capacity and the like, would be excludable.

          Is damage to one's business reputation a personal injury? Did the negligent or wrongful conduct of

du Pont amount to a tort resulting in personal injury to the Fabrys, culminating in an injury to their business
reputation, which injury in turn caused them to suffer damages, personal to them? Did the injury justify the
$500,000 amount of damages recovered?26 For the following reasons, we conclude that it did.



the payor is also a factor to be considered. See Metzger v. Commissioner, 88 T.C. 834, 847-48 (1987),
aff'd without published opinion, 845 F.2d 1013 (3d Cir.1988); Knuckles v. Commissioner, 349 F.2d 610
(10th Cir.1965). Mere lip service is given to Schleier. Recent cases by the tax court also appear to reflect
a pattern of this formalistic approach. See Henry, 77 T.C.M. (CCH) at 2209; Bland v. Commissioner, 79
T.C.M. (CCH) 1713 (2000); Sherman v. Commissioner, 77 T.C.M. (CCH) 2199 (1999).
     24
      Damage to business reputation may be an assertion of personal injury without saying so; an action
for broken bones, contusions, concussions and the like says "personal injury" without those words. The
tax court's search for a convenient shibboleth is misdirected.
     25
      As the parties have stipulated that the first prong, articulated in Burke, is met in the present case, we
need analyze only the second. One year after Schleier, in the context of punitive damages, the Supreme
Court revisited the meaning of "on account of" in O'Gilvie v. United States, 519 U.S. 79, 117 S.Ct. 452,
136 L.Ed.2d 454 (1996). The Court observed that the phrase "on account of" did not unambiguously
define itself. Id. at 454. The Court rejected the taxpayer's contention that it required merely a "but-for"
connection between "any" damages and a personal injury lawsuit. Id. The Court accepted the
government's interpretation under which only those damages were excludable that were awarded "by
reason of" or "because of" the personal injuries. Id. at 457-58. O'Gilvie is consistent with Schleier
because punitive damages do not bear the direct causal link with the victim's personal injury since the
amount of punitive damages awarded generally varies positively with the degree of the tortfeasor's
conduct, not with the extent of the injury sustained. See note 14 supra.
     26
      The reasonableness of the value placed upon damage to business reputation, $500,000, is not in
dispute. Throughout the claims procedure, litigation and mediation, the $500,000 amount remained
constant, even when initial settlement demands by the taxpayers exceeded $9 million, dropped to $7
million, and finally settled at a total of $3.8 million.
3.        The Unique Facts of this Appeal
          The destruction of Patsy's Nursery business, allegedly resulting from the Fabrys' use of the du Pont

fungicide on their plants, was a great loss. In this respect, the physical assets of the sole proprietorship were

calculated and a specific sum of money paid by the tortfeasor. Here, du Pont paid $3.3 million to replace the

Fabrys' business qua business. But, when the lost value of the business had been restored, something

intangible remained.27 Each individual taxpayer walked away from the business stigmatized by allegedly
sharp, even fraudulent, dealings. As business persons they had sold defective merchandise that was said to
have cheated the buyer. Their reputation as respected merchants and honorable people had been cut away.

Even their health appears to have been affected.

          The record indicates that both parties to the tort settlement undertook to evaluate the claims for
damage to the business itself, then to evaluate the claims for damage done to the taxpayers as sole proprietors

of the business. See Roemer, 716 F.2d at 697. Here the tort directly disparaged the Fabrys in their business

capacity, yet in this instance, the nursery business was the manifestation of the Fabrys, part and parcel of their

persona. See Greer, 207 F.3d at 328. Their business reputation was their personal reputation.28 Id. Aligning

ourselves with the reasoning by the Sixth Circuit in Greer, the distress, humiliation and mental anguish

suffered by the Fabrys through the loss of their good name were personal injuries within the "broad ambit"

of IRC § 104(a)(2). Id.

          Due to the unique facts of this case, therefore, the taxpayers have proved that the $500,000 in

damages awarded on their claim for business reputation was received "on account of personal injuries"

sufficient to satisfy the second prong of Schleier and are excludable from gross income under applicable IRC

§ 104(a)(2).

                                              V. CONCLUSION

          The decision of the tax court is REVERSED.

          BLACK, Circuit Judge, specially concurring:


     27
      One would suppose that these parties could have evaluated and settled the claims arising out of
claimed destruction of the nursery business, reserving in the Fabrys the right to sue for the damage done
to them as people whose reputation as honest persons had been eroded. Would such a reserved claim not
be a claim for personal injury? We think it would.
     28
      In reverse analogy to the line of tax cases referred to as "piercing the corporate veil" cases,
involving a sole corporate shareholder of a one-person corporation, here the Fabrys "were" their
unincorporated sole proprietorship business.
I concur in the result.
