                  T.C. Summary Opinion 2011-136



                     UNITED STATES TAX COURT



                  THELMA RUFFIN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11785-10S.             Filed December 7, 2011.



     Thelma Ruffin, pro se.

     Robert M. Romashko, for respondent.



     GUSTAFSON, Judge:   This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

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

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




     1
      Unless otherwise noted, citations herein of sections refer
to the Internal Revenue Code (26 U.S.C.), and citations of Rules
refer to the Tax Court Rules of Practice and Procedure.
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and this opinion shall not be treated as precedent for any other

case.

     The Internal Revenue Service (IRS) determined a deficiency

of $4,091 in petitioner Thelma Ruffin’s Federal income tax for

2008.       The issue for decision is whether $12,500 that Ms. Ruffin

received as settlement proceeds must be included in her gross

income.2      The IRS moved under Rule 121 for summary judgment on

this issue; Ms. Ruffin filed a response; and it is clear that

there are no material factual disputes, so the case can be

decided as a matter of law without a trial.      For the reasons set

forth below, we hold that the settlement proceeds must be

included in Ms. Ruffin’s gross income for 2008.

                                Background

        Ms. Ruffin alleges the following facts, which for purposes

of this opinion we assume to be true.

        Several times in the years 2002 to 2005, Ms. Ruffin

submitted various job applications to the City of Chicago, but

her applications were not given fair consideration.      Ms. Ruffin

joined a class action lawsuit against the City of Chicago, the

Democratic Organization of Cook County, and others, which alleged


        2
      The notice of deficiency also made adjustments to
Ms. Ruffin’s child tax credit and additional child tax credit
under section 24 and her earned income tax credit under
section 32. The IRS’s motion for summary judgment shows that
these are computational adjustments that follow necessarily from
the inclusion of the settlement proceeds in income, and
Ms. Ruffin does not dispute this showing.
                               - 3 -

that the defendants had violated a prior consent decree and

engaged in politically discriminatory hiring practices.

     As her own claim of damages, Ms. Ruffin filled out an

“Accord Claim Form” on which she stated in part:

     I am claiming monetary damages dating back to as early as
     06/12/2002. Had I been given the opportunity to interview
     for open employment opportunities, I surely would have been
     hired for the positions and earned salary ranging from 35-
     40,000 a year. I was denied the opportunity to earn this
     salary from the City of Chicago--los[t] potential wages.
     Also, I claim discrimination damages against the City of
     Chicago for not affording me the opportunity to interview
     and compete for open available employment opportunities with
     the City of Chicago.

The class action lawsuit resulted in an “Agreed Settlement Order

and Accord”.    The defendants established a “Claim Fund”, and a

court-appointed monitor divided that fund among more than 1,400

claimants, after considering--

     previously agreed upon factors.   Those factors include the
     following:

          (a) the facts presented by the Claimant regarding the
          alleged violation;

          (b) the strength of the evidence presented by the
          Claimant;

          (c) the salary or rate of pay of the position sought
          or held;

          (d) the ratio of applicants to the actual number of
          positions filled;

          (e) the economic benefit of the action at issue and
          number of eligible recipients;

          (f)    the amount of the Claim Fund; and

          (g)    the number of claims submitted.
                                - 4 -

Using those criteria, the monitor awarded $12,500 to Ms. Ruffin,

and the City of Chicago issued Ms. Ruffin a check dated May 30,

2008, in the amount of $12,500.

     Ms. Ruffin filed a Federal income tax return for 2008 that

did not report this settlement payment as income.   On March 15,

2010, the IRS issued to Ms. Ruffin a notice of deficiency that

adjusted her gross income to include the settlement proceeds and

determined the resulting tax deficiency.   On May 24, 2010,

Ms. Ruffin filed her petition, disputing that inclusion and

asking this Court to redetermine her deficiency.

                            Discussion

I.   General legal principles

     As a general rule, the IRS’s determinations are presumed

correct, and the taxpayer has the burden of establishing that the

determinations in the notice of deficiency are erroneous.

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

However, this case is now before us on a motion for summary

judgment under Rule 121.   In that context the moving party bears

the burden of establishing that there are no genuine issues of

material fact, and factual inferences are drawn in the light most

favorable to the party opposing the motion.   See Dahlstrom v.

Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commissioner,

79 T.C. 340, 344 (1982).
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      Section 61(a) provides the following broad definition of the

term “gross income”:   “Except as otherwise provided in this

subtitle, gross income means all income from whatever source

derived”.   Section 61(a) is thus broad in its scope, and

exclusions from gross income must be narrowly construed.

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

II.   The parties’ contentions

      In its motion for summary judgment, the IRS argues that

Ms. Ruffin’s settlement proceeds fall within the broad scope of

section 61(a):

           15. Based upon this claim form [quoted above],
      petitioner was awarded damages for lost wages. This Court
      has stated that the critical question regarding settlement
      proceeds is “in lieu of what was the settlement paid.”
      Bagley v. Commissioner, 105 T.C. 396, 406 (1995). If the
      settlement proceeds represent something that would have been
      taxable, such as wages, then the settlement proceeds, too,
      are taxable. Estate of Williams v. Commissioner, T.C. Memo
      2009-5.

           16. Here, petitioner’s claim was for redress for lost
      wages, and accordingly, the award stemming from that claim
      is taxable.

      Petitioner opposes the IRS’s motion by contending that the

settlement proceeds should not be characterized as lost wages.

Instead, she characterizes them variously:   as a settlement for

the defendants’ violations of the law; as compensation for the

city’s rigged hiring system; as monetary damages or award; and as

political discrimination damages.
                              - 6 -

III. Analysis

     For four reasons, we must hold in favor of the IRS:

     A.   Lost wages are included in gross income.

     The IRS is correct that the nature of the claim that was the

basis for the settlement controls the nature of those damages for

tax purposes.   Cf. United States v. Burke, 504 U.S. 229, 237

(1992) (determining excludability from gross income under

section 104(a)(2)).   Thus, the nature of the damages is dictated

by the nature of the injury suffered, and here that injury was

clearly wage-related.   The damages were paid for (in Ms. Ruffin’s

own words) “los[t] potential wages”.   If the City of Chicago had

hired Ms. Ruffin for one of the jobs for which she applied, the

wages she earned from that job would have been subject to tax;

because she was wrongly denied the chance to earn those (taxable)

wages and received instead a settlement payment to recompense

that loss of (taxable) income, the payment that the City of

Chicago made to compensate her for lost (taxable) wages takes on

the taxable character of the income it replaced.

     B.   The settlement was not for physical injuries or
          sickness.

     When the taxability of settlement proceeds is disputed, a

common issue is whether the proceeds are excluded from income

because they were “received * * * on account of personal physical

injuries or physical sickness”, under section 104(a)(2).    In this

case, however, Ms. Ruffin makes no allegation that she received
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her settlement on account of “physical injuries or physical

sickness”, and there is nothing in the record to suggest that her

damages for the City of Chicago’s discriminatory hiring practices

had any physical component.   The record shows that emotional

distress was one of the forms of injury that the settlement was

to redress; and a victim of employment discrimination may in some

circumstances suffer physical symptoms from the emotional

distress of being mistreated; but section 104(a) is clear that

“emotional distress shall not be treated as a physical injury or

physical sickness”; and the legislative history of this statutory

provision shows that “[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.

Conf. Rept. 104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041.

     Therefore, to be excludable from gross income under section

104(a)(2), a settlement award would have to be paid to a taxpayer

on account of physical injury or physical sickness other than

symptoms of emotional distress; but Ms. Ruffin has made no hint

of suffering either emotional distress or such resulting injuries

or sickness.

     C.   Ms. Ruffin’s alternative characterizations of the
          settlement proceeds do not disprove that they were lost
          wages.

     Even if we accept Ms. Ruffin’s characterizations, they are

not really at odds with the IRS’s characterization of the
                              - 8 -

proceeds as lost wages.   Damages can be both “lost wages” and

“money damages” for “political discrimination”.   If we accept

Ms. Ruffin’s contention that the proceeds are (for example) a

settlement for “political discrimination”, that term describes

the nature of the wrong that the defendants committed, but it

does not describe the nature of the damages Ms. Ruffin received,

which is the important issue in this suit.   If a hypothetical

taxpayer were to receive settlement proceeds for an injury

suffered in a politically motivated physical assault, then she

might be able to claim that the settlement proceeds were received

on account of personal physical injuries.    For tax purposes, the

political motivation of the hypothetical assault would not be

material; but the nature of the damages paid--i.e., a payment for

physical injury--would dictate the tax consequences (i.e., under

section 104(a)(2)).   Here the political motivation for the City

of Chicago’s employment discrimination is not material; but the

nature of the damages paid--i.e., a payment for (in Ms. Ruffin’s

own words) “los[t] potential wages”--dictates the tax

consequences.

     D.    Settlement proceeds are taxable income even if they are
           not payment for “lost wages”.

     Even if we were to overlook evidence in the record and

Ms. Ruffin’s own characterization and conclude that the damages

were not “lost wages”, the damages would not thereby become non-

taxable.   As we have noted, section 61(a) defines gross income to
                                - 9 -

include “all income from whatever source derived”, and exclusions

from gross income are to be narrowly construed.      Ms. Ruffin

received from the City of Chicago a payment of money, however it

might be characterized.   It falls within the scope of the broad

statutory term “all income”.    (Emphasis added.)    Unless she can

point to a statutory provision that excludes it from gross

income, it is included.   Her position appears to assume that the

law excludes “settlements”, or “monetary damages”, or “political

discrimination awards” from gross income, but there is no such

exception to section 61(a).    Payments in settlement of employment

discrimination claims are taxable unless a statutory provision

justifies exclusion from income.    See Seidel v. Commissioner,

T.C. Memo. 2007-45, affd. 324 Fed. Appx. 621 (9th Cir. 2009).

There is no statutory provision that would exclude Ms. Ruffin’s

settlement payment from gross income, whether or not it was for

“lost wages”.

                              Conclusion

     We hold that the $12,500 payment from the City of Chicago is

includable in Ms. Ruffin’s gross income for tax year 2008, and we

will grant the IRS’s motion.    For that reason,


                                        An appropriate order and

                                decision will be entered.
