                  T.C. Summary Opinion 2011-134



                      UNITED STATES TAX COURT



               DENISE DIANA DENNIS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22198-09S.              Filed December 5, 2011.



     Denise Diana Dennis, pro se.

     Joline M. Wang, for respondent.



     WELLS, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1   Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and



     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986 in effect for the year at issue,
and Rule references are to the Tax Court Rules of Practice and
Procedure.
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this opinion shall not be treated as precedent for any other

case.   Respondent determined a deficiency of $11,396 in

petitioner’s 2007 Federal income tax and an accuracy-related

penalty of $2,279 pursuant to section 6662(a).    The issues we

must decide are:   (1) Whether proceeds from the settlement of a

racial discrimination lawsuit under the Missouri Human Rights

Act, alleging emotional distress, are excludable from gross

income; (2) whether petitioner failed to report wages of $3,510;

and (3) whether petitioner is liable for the accuracy-related

penalty pursuant to section 6662(a).

                            Background

     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.    At the time she

filed her petition, petitioner was a resident of Missouri.

     Petitioner was employed at Grandview Care Center, Inc.

(Grandview), from approximately August 2005 until she resigned in

December 2005.   During that time, she suffered racial harassment

from Grandview’s residents, who spoke to her using racial

epithets.   Although she complained to her supervisors, the

situation did not improve; and she eventually resigned because

her work environment was so unpleasant.   After resigning,

petitioner filed a lawsuit against Grandview under the Missouri

Human Rights Act, claiming damages for “loss of self-esteem,
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humiliation, emotional distress and mental anguish and pain, and

related compensatory damages.”    Petitioner suffered no physical

injuries as a result of the harassment.    During June 2007,

Grandview entered into a confidential settlement agreement and

release (settlement) with petitioner.    Pursuant to the

settlement, Grandview paid petitioner $82,500.    Of that amount,

$3,674.24 constituted legal expenses, $35,471.59 was for

attorney’s fees, and petitioner received a check for $43,354.17.

     On July 10, 2007, petitioner signed a document from her

attorneys titled “Settlement Distribution - Tax Consequences”,

which stated, among other things:

     Counsel has informed client that there are complicated
     issues surrounding the taxability of employment
     discrimination awards and/or settlements. Counsel has
     further informed Client [sic] that payment for non-physical
     injuries are generally taxable * * *.

          *       *       *         *       *       *       *

     Counsel informed Client [sic] that the law is unsettled as
     to whether emotional damages in non-physical injury cases
     are taxable. Counsel informed client about the decision in
     Murphy v. Internal Revenue Service 460 F.3d 79 (2006)
     holding that such damages are not always taxable. Counsel
     has urged client to obtain professional tax advice and
     provide a copy of the attached case to the tax professional
     to determine what, if any, impact it has on the resolution
     of the issue of the tax consequences associated with this
     settlement. Counsel has informed Client [sic] that there
     has been an appeal of that case and the case may be
     overturned and/or may not be followed by the Courts in
     Missouri * * *.

The case mentioned in that document, Murphy v. IRS, 460 F.3d 79

(D.C. Cir. 2006), was later vacated by the Court of Appeals for
                               - 4 -

the District of Columbia Circuit on December 22, 2006, Murphy v.

IRS, 99 AFTR 2d 2007-396, 2007-1 USTC par. 50,228 (D.C. Cir.

2006).   The Court of Appeals subsequently heard additional

arguments before issuing another decision on July 3, 2007, in

which it held that the taxpayer’s compensatory award for

emotional distress was taxable.   Murphy v. IRS, 493 F.3d 170

(D.C. Cir. 2007).   However, petitioner was not aware of those

developments.

     Petitioner received a Form 1099-MISC, Miscellaneous Income,

reporting her income from the settlement.   Petitioner spoke with

several tax return preparers about her 2007 tax return.    She

first spoke with someone at Jackson Hewitt, to whom she gave a

copy of her Form 1099.   The tax return preparer at Jackson Hewitt

asked her about the lawsuit.   Petitioner told her:   “Well, I am

not supposed to disclose, but it is emotional distress.”    The tax

return preparer at Jackson Hewitt was unsure about the tax

consequences of the settlement, so she called someone.    However,

that person apparently did not know either, and Jackson Hewitt

never gave petitioner an answer about the tax consequences.

Petitioner then left Jackson Hewitt because she did not think the

people there knew what they were doing.

     Petitioner called another tax return preparer and inquired

on the phone about whether the proceeds of a settlement from a

lawsuit seeking damages for emotional distress were taxable.     She
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could not remember whom she had called, but she remembered that

the office was at 47th and Troost.      The person with whom

petitioner spoke on the phone told her that the proceeds of the

settlement were not taxable.

       Next, petitioner sought advice from Jarods Accounting

Services.    However, petitioner did not give the tax return

preparer at that firm a copy of her Form 1099 because she could

not find it.    She told the tax return preparer that she had

received a confidential settlement but did not ask the preparer

about the tax consequences of the settlement.      The tax return

preparer did not ask petitioner for the Form 1099, and she

omitted from petitioner’s return the income from the settlement.

       During 2007, petitioner received $3,510 in wages from a

woman named Barbara Biederman (Ms. Biederman) for whom petitioner

provided caretaking services.    However, petitioner did not report

those wages on her return because she had not received a Form W-

2, Wage and Tax Statement.    Petitioner called Ms. Biederman once

to inquire about the Form W-2 and was told it would be mailed to

her.    Petitioner believed that Ms. Biederman was withholding

income tax from her wages, but Ms. Biederman actually withheld

only Social Security and Medicare taxes.      Petitioner did not

report the wages she received from Ms. Biederman on her 2007 tax

return.
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     Respondent mailed petitioner a notice of deficiency for her

2007 tax year on July 20, 2009.    In the notice of deficiency,

respondent determined that petitioner’s income should be

increased to reflect wages of $3,510 received from Ms. Biederman

and other income of $82,500 from the settlement.     Respondent

allowed petitioner a deduction of $39,146 for her attorney’s fees

and legal expenses.    Petitioner timely filed her petition with

this Court.

                             Discussion

     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).   The definition of gross income is

broad in scope, while 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).   For the damages to be

excluded under this provision, the underlying cause of action

must be based in tort or tort-type rights and the proceeds must

be damages received on account of personal physical injury or

sickness.    Commissioner v. Schleier, supra at 337.   Emotional
                               - 7 -

distress is not treated as a personal physical injury or physical

sickness except for damages not in excess of the amount paid for

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

(flush language).

     Petitioner has cited Murphy v. IRS, 460 F.3d 79 (D.C. Cir.

2006), to argue that the proceeds of her settlement compensating

her for emotional distress should be exempt from income.

However, as noted above, the Murphy decision petitioner cites was

later vacated by the Court of Appeals.   Accordingly, we reject

petitioner’s argument that her income from the settlement was

nontaxable.

     We next consider whether petitioner owes income tax on the

wages of $3,510 she received from Ms. Biederman.   Petitioner did

not dispute that she failed to report her wages from Ms.

Biederman on her tax return.   However, she contended that Ms.

Biederman had told her that her Federal income tax was being

withheld from her wages.   Respondent determined that petitioner’s

Federal income tax had not been withheld.   Because petitioner

bears the burden of proof and offered no evidence to the

contrary, we conclude that no income tax had been withheld from

the wages petitioner received from Ms. Biederman and that

petitioner failed to pay income tax on those wages.

     Finally, we consider whether petitioner is liable for the

accuracy-related penalty pursuant to section 6662(a).   Generally,
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the Commissioner bears the burden of production with respect to

any penalty, including the accuracy-related penalty.    Sec.

7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).     To

meet that burden, the Commissioner must come forward with

sufficient evidence indicating that it is appropriate to impose

the relevant penalty.   Higbee v. Commissioner, supra at 446.       The

Commissioner has the burden of production only; the ultimate

burden of proving that the penalty is not applicable remains on

the taxpayer.   Id.

     Subsection (a) of section 6662 imposes an accuracy-related

penalty of 20 percent of any underpayment that is attributable to

causes specified in subsection (b), including a “substantial

understatement” of income tax.     Section 6664(c)(1) provides that

the accuracy-related penalty shall not apply to any portion of an

underpayment if it is shown that there was reasonable cause for

the taxpayer’s position with respect to that portion and that the

taxpayer acted in good faith with respect to that portion.     The

determination of whether the taxpayer acted with reasonable cause

and in good faith is made on a case-by-case basis, taking into

account the relevant facts and circumstances.    Sec.

1.6664-4(b)(1), Income Tax Regs.    “Circumstances that may

indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all of the facts and circumstances, including the experience,
                               - 9 -

knowledge, and education of the taxpayer.”    Id.   Generally, the

most important factor is the extent of the taxpayer’s efforts to

assess the proper tax liability.   Id.   An honest misunderstanding

of fact or law that is reasonable in the light of the experience,

knowledge, and education of the taxpayer may indicate reasonable

cause and good faith.   Remy v. Commissioner, T.C. Memo. 1997-72.

     Petitioner is obviously unfamiliar with tax law.    She was

advised by the attorneys who handled her lawsuit that she should

seek professional advice regarding the tax treatment of her

income from the settlement.   By advising her of the Court of

Appeals’ holding in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006),

those attorneys also provided her with a reason to believe that

the income from the settlement might not be taxable.2    Petitioner

consulted three different tax preparation services, and none of

them advised her that the income from the settlement was taxable.

On the basis of petitioner’s background, education, and actions

seeking advice on a complex tax issue, we conclude that

petitioner had reasonable cause for her position and acted in

good faith on her belief, although mistaken, when she failed to


     2
      As noted above, by the time petitioner signed the
“Settlement Distribution - Tax Consequences” document prepared by
her attorneys on July 10, 2007, the decision in Murphy v. IRS,
460 F.3d 79 (D.C. Cir. 2006), had been vacated by Murphy v. IRS,
99 AFTR 2d 2007-396, 2007-1 USTC par. 50,228 (D.C. Cir. 2006)
(vacated Dec. 22, 2006), and the Court of Appeals had decided
Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 2007) (decided July 3,
2007). Accordingly, the information provided to petitioner by
her attorneys was inaccurate even when she signed the document.
                                - 10 -

report her income from the settlement.     Consequently, we hold

that petitioner is not liable for the accuracy-related penalty on

the portion of her underpayment attributable to income from the

settlement.

     Petitioner contends that she acted reasonably in not

reporting her income from Ms. Biederman because she did not

receive a Form W-2 and mistakenly believed that Ms. Biederman had

already withheld her Federal income tax.     However, it was not

necessary that petitioner receive a Form W-2 in order for her to

know that she had received compensation for her services for Ms.

Biederman.    See, e.g., Brunsman v. Commissioner, T.C. Memo.

2003-291.     It was not reasonable for petitioner to simply omit

that compensation on her tax return.     Accordingly, petitioner is

not excused from liability for the accuracy-related penalty on

the income she received from Ms. Biederman.

     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.
