                           NOT FOR PUBLICATION

                    UNITED STATES COURT OF APPEALS                              FILED
                            FOR THE NINTH CIRCUIT                                JUN 24 2015

                                                                             MOLLY C. DWYER, CLERK
                                                                              U.S. COURT OF APPEALS

JUANITA M. SMALLWOOD,                            No. 13-55304

              Plaintiff - Appellant,             D.C. No. 5:12-cv-00023-VAP-
                                                 DTB
 v.

UNITED STATES GOVERNMENT,                        MEMORANDUM*

              Defendant - Appellee.


                   Appeal from the United States District Court
                       for the Central District of California
                   Virginia A. Phillips, District Judge, Presiding

                        Argued and Submitted June 3, 2015
                              Pasadena, California

Before: FISHER and BYBEE, Circuit Judges and FOOTE,** District Judge.

      Plaintiff-appellant Juanita M. Smallwood appeals the district court’s grant of

summary judgment in favor of the United States, wherein the district court found

that Smallwood was not entitled to a refund for the taxes that she paid on


        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
       **
            The Honorable Elizabeth E. Foote, United States District Judge for the
Western District of Louisiana, sitting by designation.
settlement proceeds she received in 2004 in connection with a state court action

against the California Department of Corrections (“CDC”) and two of its

employees. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we review de

novo the district court's grant of summary judgment and its interpretation of the

Internal Revenue Code. Reynoso v. United States, 692 F.3d 973, 977 (9th Cir.

2012).

      We agree with the district court’s determination that there is a genuine

factual dispute as to what dollar amount, if any, of the settlement proceeds from the

CDC was intended to compensate Smallwood for her physical injuries or physical

sickness. Under 26 U.S.C. § 104(a)(2), Smallwood would be entitled to exclude

from her gross income for 2004 the portion of the settlement proceeds that was

paid to her with the intent of compensating her for physical injuries or physical

sickness. 26 U.S.C. § 104(a)(2) (explaining “gross income does not include . . . the

amount of any damages (other than punitive damages) received (whether by suit or

agreement and whether as lump sums or as periodic payments) on account of

personal physical injuries or physical sickness”); see Rivera v. Baker W., Inc., 430

F.3d 1253, 1256-57 (9th Cir. 2005).

      Nevertheless, instead of making a factual determination regarding what

dollar amount of the settlement proceeds was attributable to Smallwood’s physical


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injuries or physical sickness within the meaning of § 104(a)(2) and therefore

excludable from gross income, the district court erroneously found that Smallwood

had failed to establish that she was entitled to any refund as a matter of law. The

district court reasoned that because Smallwood failed to report her attorney’s fees

and litigation expenses as part of her gross income for 2004, any potential refund

must be offset by including all of those fees and expenses in her gross income and

overall tax burden for that year. However, the district court’s conclusion was in

error for two reasons. First, the district court incorrectly calculated what portion of

the settlement proceeds would need to be attributable to Smallwood’s physical

injuries or physical sickness in order for her to receive a tax refund for 2004. As

the government explains on appeal, “if the court were to determine that a certain

percentage of the settlement proceeds was paid on account of physical injury, that

percentage would apply to the entire $995,000 settlement, including the amount

retained by the attorney.” Second, the district court erred by failing to consider

whether Smallwood would be entitled to any deductions for her attorney’s fees and

litigation costs relating to the underlying state court settlement, which may have

reduced her overall tax burden for 2004. Again, as the government explains on

appeal, “any taxable component of the award would generate a (potential)

deduction for the corresponding portion of the attorney’s fee.” Certainly, once


                                           3
these errors are resolved, there may be other factual and legal determinations that

need to be made by the district court in order to ascertain whether Smallwood is

entitled to a refund.

      In light of these errors, we vacate and remand to the district court for further

proceedings.

      Costs of appeal are awarded to Smallwood.

      VACATED AND REMANDED.




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