                            T.C. Summary Opinion 2018-36



                            UNITED STATES TAX COURT



          JACQUES L. FRENCH AND SHERRY L. FRENCH, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 14777-15S.                            Filed July 12, 2018.



      Michelle L. Drumbl and Roland O. Hartung (student), for petitioners.

      Timothy B. Heavner and Matthew S. Reddington, for respondent.



                                 SUMMARY OPINION


      LEYDEN, Special Trial 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


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                        -2-

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In a notice of deficiency dated April 13, 2015, respondent determined a

deficiency in petitioners’ 2012 Federal income tax of $7,231 and a section 6662(a)

accuracy-related penalty of $1,446. After concessions by the parties,2 the issue for

decision is whether the settlement payment Mr. and Mrs. French received in 2012

is excludable from their gross income in part under the disputed debt doctrine and

in part under section 104(a)(2). The Court holds that the settlement payment is not

excludable from their gross income for 2012.

                                    Background

      Some of the facts are stipulated and are so found. Mr. and Mrs. French

resided in Virginia when they timely filed their petition.


      1
        (...continued)
Revenue Code, as amended, in effect at all relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
      2
       Respondent has conceded that Mr. and Mrs. French are not liable for the
sec. 6662(a) accuracy-related penalty for 2012. Mr. and Mrs. French do not
dispute that they received a settlement payment from Bank of America of
$41,333.34 in 2012, but they dispute whether it must be included in gross income
for 2012. The other adjustments in the notice of deficiency to a deduction for
medical expenses on Schedule A, Itemized Deductions, and to the amount of
taxable Social Security retirement income are computational. These adjustments
will be resolved by the Court’s resolution of the issue for 2012 and will not be
discussed further.
                                        -3-

I.      Bank of America Loan

        In July 2008 Mr. and Mrs. French obtained a loan to purchase their personal

residence. At some point thereafter Bank of America acquired that loan and

continued to own it during 2012. In August 2009 BAC Home Loans Servicing,

LP (BAC), a wholly owned subsidiary of Bank of America, became the loan

servicer for Bank of America.3 In December 2009 Mr. and Mrs. French requested

a loan modification through BAC. In late December 2009 they signed a

modification agreement (hereinafter first modification agreement). It was their

understanding that the first modification agreement was effective February 1,

2010.

II.     Impact of Bank of America’s Phone Calls on Mrs. French’s Recovery

        Mrs. French suffered from lower back and leg pain caused by a herniated

disc that affected her ability to walk, work, and perform other activities. She

required back surgery to alleviate her symptoms and was admitted to the hospital

on October 13, 2009, for back surgery and discharged on October 15, 2009.

        From late 2009 and into early 2010, Mr. and Mrs. French began to receive

phone calls from Bank of America alleging that they were delinquent on their loan


        3
        Hereinafter, where appropriate, BAC and Bank of America are sometimes
collectively referred to as Bank of America.
                                        -4-

and that their mortgage was about to go into foreclosure. The phone calls were

made to their landline. Mr. French would answer the phone when he was home.

When he was at work Mrs. French, her parents (who cared for Mrs. French while

Mr. French was at work), or Mr. and Mrs. French’s daughter would answer the

phone. It is not clear whether Mrs. French answered the phone when her parents

or her daughter were available to do so.

      Mr. French worried about the effect of the phone calls on Mrs. French’s

recovery because the doctor had ordered bed rest and avoidance of stress. Mr.

French requested that Bank of America contact only him because of Mrs. French’s

medical problems, but they continued calling the landline. When he spoke with a

Bank of America representative, he would try to explain the situation with respect

to their loan modification. However, Mr. and Mrs. French would receive calls

from multiple branches within Bank of America, and Mr. French would have to

explain the same thing to multiple representatives. Mr. French testified that after

he answered the phone calls he would explain to Mrs. French what was going on

“but in a more loving way”. Sometimes he would not tell her immediately because

she was in pain and he wanted her to rest.

      Meanwhile Mrs. French began experiencing lower back pain again and was

readmitted to the hospital from December 26 to 30, 2009, January 4 to 6 and 19 to
                                        -5-

21, 2010. She underwent surgery again during each of the two hospital stays in

January 2010.

      The number of phone calls from Bank of America increased in January

2010. Mr. French estimated receiving a phone call from Bank of America at least

once a day during that month but some days received up to five. Mr. and Mrs.

French were upset by the constant phone calls and did not know what to do to

resolve their situation with Bank of America. They received the most disturbing

phone call after Mrs. French was discharged from the hospital on January 21,

2010. Mrs. French answered the phone call from Bank of America, and the Bank

of America representative “said that officers [were] on the way to evict * * * [Mr.

and Mrs. French] from the house”.

      On or about January 23, 2010, Mrs. French began to experience shortness of

breath and chest pain. She was admitted to an intensive care unit on January 26,

2010, with respiratory failure due to a large pulmonary emboli and put on

ventilator support. Mr. French testified that Mrs. French suffered two pulmonary

emboli, passed away twice during this period, was resuscitated, and was in a

medically induced coma for several days. After making a recovery, Mrs. French

was discharged from the hospital on February 4, 2010. Mrs. French suffered from

acute asthma before the hospitalization and would only sometimes use her rescue
                                            -6-

inhaler. Following that hospitalization, however, she used an inhaler more

frequently. The record does not contain any evidence that Mrs. French was

hospitalized after February 4, 2010.

III.   Bank of America Settlement

       While Mrs. French was in the hospital, Mr. French sought legal counsel to

handle the Bank of America phone calls. The phone calls from Bank of America

continued through February 2010 until Mr. and Mrs. French retained counsel.

       A.       Complaint Allegations

       Mr. and Mrs. French, through their attorneys Steven M. Blatt and Thomas

D. Domonoske, filed a complaint on November 1, 2011, in the Circuit Court for

Rockingham County, Virginia,4 against Bank of America and BAC. The

complaint alleged, among other things: “As a result of BAC’s actions, * * * [Mr.

and Mrs. French] have suffered lost time, inconvenience, distress, fear, and have

been denied the benefit of the loan modification they were promised, and are being

charged too much on their loan.” Mr. and Mrs. French alleged the following in

their complaint to support their claims for relief.5


       4
      Bank of America removed the case to the U.S. District Court for the
Western District of Virginia, Harrisonburg Division.
       5
           The remaining paragraphs in this Part III.A. are the factual assertions
                                                                           (continued...)
                                        -7-

      As of November 2009 they did not have any delinquent unpaid interest

outstanding on the loan, which was subject to an interest rate of 6.375%. In

December 2009 petitioners requested the first loan modification. The new terms

for the loan under the proposed first modification agreement were: (1) a principal

balance of $159,637.84,6 (2) an interest rate of 5.125% effective January 1, 2010,

(3) monthly payments of $869.21 for interest and principal, (4) a payment start

date of February 1, 2010, and (5) a payment end date of August 1, 2038. On

December 29, 2009, Mr. and Mrs. French signed the proposed first modification

agreement and returned it to BAC with a payment of $1,067.107 made by cashier’s

check.

      Pursuant to the proposed first modification agreement, BAC should have

adjusted the accounting records on the loan to show the new principal balance of

$159,637.84 with the proposed first payment due on February 1, 2010. Instead,


      5
        (...continued)
petitioners alleged in the complaint which the parties stipulated.
      6
       BAC added capitalized delinquent interest of $4,118.67 to the new
principal. Mr. and Mrs. French relied on BAC’s statement of accounting when
they signed the proposed first modification agreement but in their complaint
alleged that the delinquent interest was at most $1,085.46 for the accrued interest
for November and December 2009.
      7
      After including insurance and taxes, the monthly payment under the
proposed first modification agreement was supposed to be $1,067.10.
                                       -8-

sometime in January 2010 BAC began threatening Mr. and Mrs. French with

foreclosure, claiming they were in default on their original loan note. On January

5, 2010, BAC sent them a notice that their mortgage was about to go into

foreclosure.8

      Mr. French spoke by telephone with a BAC representative during the first

week in January 2010. The BAC representative asked him why he had not

returned the proposed first modification agreement to BAC. He explained that he

and Mrs. French had returned the proposed first modification agreement with a

payment of $1,067.10. The BAC representative notified him that the company

that had sent them the proposed first modification agreement was not a Bank of

America company. That representative instructed Mr. and Mrs. French to send to

BAC a copy of the proposed first modification agreement, to stop payment on the

cashier’s check, and to send a new cashier’s check of $1,067.10 to BAC. Mr. and

Mrs. French followed those instructions.

      After several telephone conversations in January 2010, the BAC

representative notified Mr. and Mrs. French that Bank of America had agreed to

accept the proposed first modification agreement, that the modification case was

      8
        The notice that BAC sent about the foreclosure was sent to Mr. and Mrs.
French more than two weeks before the phone call on January 21, 2010, that they
assert triggered Mrs. French’s shortness of breath and chest pains. See supra p. 5.
                                         -9-

considered closed, and that they should proceed to make their payments based on

that agreement. Mr. and Mrs. French made the following payments in 2010 on the

basis of what they believed was the accepted first modification agreement:

                              Payment date      Amount
                             Dec. 29, 20091 $1,067.10
                             Jan. 14, 2010      1,069.00
                             Feb. 16, 2010      1,067.10
                             Mar. 28, 2010      1,067.10
                             Apr. 26, 2010      1,067.10
                             May 21, 2010       1,067.10
                             June 27, 2010      1,067.10
                             July 29, 2010      1,067.10
                             Aug. 27, 2010      1,067.10
                             Sept. 28, 2010     1,067.10
                              Total            10,672.90

      1
        Mr. and Mrs. French subsequently canceled the cashier’s check they had
sent to a company that BAC informed them was not associated with Bank of
America; they sent a new cashier’s check in the same amount to BAC in January
2010. See supra p. 8.

      However, BAC did not process the proposed first modification agreement as

agreed and continued to assess interest at the interest rate on the original loan

rather than at the lower rate specified in the proposed first modification agreement.

Also, BAC did not apply Mr. and Mrs. French’s monthly payments for January
                                       - 10 -

through September 2010 to the principal, accrued interest, or escrow. Instead,

BAC placed the payments for February through August 2010 into a separate, non-

interest-bearing account and treated the payments as if they were related to fees on

the loan processing.

      In October 2010 a BAC representative spoke with Mr. French by telephone

and notified him that Bank of America had decided not to honor the proposed first

modification agreement, that their original loan was severely delinquent, and that

they had to submit another modification agreement or their mortgage would go

into foreclosure. On October 27, 2010, BAC sent them another proposed

modification agreement (hereinafter second modification agreement), which

would modify the original loan. In that agreement BAC notified Mr. and Mrs.

French that they were in default on their original loan and that BAC would

complete collection action, including foreclosure, if they did not sign the proposed

second modification agreement.

      The proposed second modification agreement contained the following

terms: (1) a principal balance of $169,055.49, (2) an interest rate of 4.625%

effective January 1, 2010, (3) monthly payments of $869.18 for interest and

principal, (4) a payment start date of January 1, 2010, and (5) a payment end date

of August 1, 2040. The proposed second modification agreement included
                                       - 11 -

delinquent accrued interest of $12,291.88, calculated under the original interest

rate, for September 2009 through December 2010 and delinquent escrow of

$13,686.32. It did not address the application of the payments Mr. and Mrs.

French had made during 2010. To prevent their mortgage from going into

foreclosure Mr. and Mrs. French signed the proposed second modification

agreement on November 4, 2010, and Bank of America accepted it. Thereafter

they repeatedly requested clarification from BAC on the status of the payments

they made in 2010 but did not receive adequate responses.

      In September 2011 BAC sent Mr. and Mrs. French a notice stating that if

they paid less than the full amount of a monthly mortgage payment, BAC would

not apply the payment to their loan and would instead return the payment to them.

BAC initially accepted Mr. and Mrs. French’s payment of $1,067.10 for

September 2011 but in October 2011 sent them a notice with the September 2011

check asserting that the September 2011 payment was for less than the full amount

of their monthly mortgage payment. According to the complaint “[t]he notice was

incorrectly based on the assumption and assertion that the amount of * * * [Mr.

and Mrs. French’s] monthly payment had been unilaterally increased by BAC to

$1,081.49.” Shortly thereafter Mr. and Mrs. French filed the complaint.
                                       - 12 -

      B.     Relief Requested in Complaint

      The complaint set forth six claims for relief. First, Mr. and Mrs. French

requested that the proposed first and accepted second modification agreements be

revised into one agreement that reflected the intent of the parties. Second, they

requested that the accepted second modification agreement be rescinded because

Bank of America’s misrepresentations and failure to provide truthful and accurate

information constituted fraud and a lack of consideration for the accepted second

modification agreement.

      Third, Mr. and Mrs. French requested punitive damages on a claim of

conversion. They alleged that Bank of America’s failure to allocate their

payments and BAC’s improper accounting constituted a conversion of the

payments for Bank of America’s own use. They also alleged that the conversion

of the payments caused their loan account to be treated as if it were in default and

that BAC refused to correct its accounting and to answer questions about its

actions when notified. They further alleged that Bank of America acted

knowingly and willfully or in conscious disregard of the law and their rights,

which justified the award for punitive damages.

      Fourth, Mr. and Mrs. French requested damages, including punitive

damages, on a claim of fraud. They alleged that BAC used its position of power
                                        - 13 -

and authority over the accounting of their loan payments to mislead them and to

place them in fear of losing their home to foreclosure. They also alleged that BAC

had a duty to provide them with timely and accurate information about their loan

but knowingly made false misrepresentations to them about the amount of the

delinquent interest, the loan’s being in default, and its right to foreclose. They

also alleged that they relied on those misrepresentations to their detriment and

suffered damages of $50,000 as a result of their reliance. According to the

complaint, BAC acted knowingly and willfully or in conscious disregard of the

law and Mr. and Mrs. French’s rights, which justified the award for punitive

damages.

      Fifth, Mr. and Mrs. French requested that Bank of America be estopped

from denying that the proposed first modification agreement was binding, denying

that they had performed it, asserting or maintaining the validity of the accepted

second modification agreement, unilaterally increasing the amount of the monthly

payment to $1,081.49, declaring them in default, accelerating the loan, and

initiating or pursuing foreclosure proceedings against them.

      Sixth, Mr. and Mrs. French requested additional damages of $1,000 under

part of the Real Estate Settlement Procedures Act (RESPA), as codified at 12

U.S.C. sec. 2605(f)(1)(B). According to Mr. and Mrs. French, BAC received a
                                        - 14 -

qualified written request under 12 U.S.C. sec. 2605(e) from them but failed to

make appropriate corrections to their loan account within 60 days of the request,

failed to conduct an investigation on the matters raised in the request, and failed to

provide them with a proper written response. They alleged that BAC was liable

for all damages associated with its failure to respond to their request and that the

failure to respond was the result of a pattern or practice of noncompliance.

      In sum, in addition to the equitable relief sought, Mr. and Mrs. French

requested damages of $50,000, additional damages under 12 U.S.C. sec.

2605(f)(1)(B) of $1,000, punitive damages not to exceed $350,000, reasonable

attorney’s fees, costs, and any other relief deemed appropriate. The complaint did

not seek any relief for personal physical injuries or physical sickness with respect

to Mrs. French.

      C.     Correspondence Before Mediation Conference

      According to Mr. Domonoske, who represented Mr. and Mrs. French in

their lawsuit, Bank of America immediately agreed to hold a mediation conference

after the complaint was filed. In a letter dated February 9, 2012, to Bank of

America’s attorney (hereinafter demand letter), Mr. Domonoske detailed Mr. and

Mrs. French’s demand for a settlement:
                                       - 15 -

      [I]t has two parts--giving * * * [Mr. and Mrs. French] the benefit of
      the bargain on the loan modification as promised, and a cash
      payment. The cash payment has three parts--the stress,
      inconvenience, and lost time caused by the repeated * * * [Bank of
      America] misconduct, punitive damages to send a message that such
      behavior must never be repeated, and attorney’s fees.

      With respect to the cash payment, Mr. and Mrs. French demanded $197,500

for compensatory and punitive damages, substantially less than the amount of

damages requested in the complaint. In that letter Mr. Domonoske alleged that

Bank of America’s repeated and persistent foreclosure misconduct caused Mr. and

Mrs. French “tremendous anxiety and stress” and “forced them to spend lots of

time trying to get * * * [Bank of America] to act properly.” He further alleged:

      In this instance, Mrs. French has suffered greatly because, as a result
      of operations and hospitalizations for a back injury, she was told by
      her doctor that she had to avoid stress. Instead of home being a
      sanctuary where she could recover, her home was inundated with
      calls from * * * [Bank of America] threatening foreclosure. Mr.
      French would promise her that it would be all right, that he would
      take care of it, that they could not lose their home when they were
      making their payments, that he would speak with the local bank
      people, and that he would get it straightened out. Although he did
      these things repeatedly and repeatedly was given assurances that it
      was fixed, it never was fixed. His inability to get * * * [Bank of
      America] to act properly and protect his wife from this stress then
      caused great strain on their marriage. This harm, that never should
      have occurred, is compensable. Although Mrs. French’s initial injury
      was not caused by * * * [Bank of America], the constant barrage of
      phone calls to this couple, who were making their payments and who
      had a binding permanent loan modification agreement, resulted in
      particular harm to them.
                                        - 16 -

      On February 20, 2012, the day before the mediation conference, Mr.

Domonoske emailed Bank of America’s attorney about the following proposed

terms for resetting the loan account: (1) an interest rate of 4.625%; (2) a principal

and interest monthly payment of $869.16; (3) a total monthly payment, including

escrow and private mortgage insurance, of $1,081.55; and (4) a principal balance

of $164,811.74 as of February 21, 2012. In the body of the email Mr. Domonoske

stated: “I will let you know that my numbers show the true principal balance is

about $7,500 less than the amount used here, after applying all payments timely. I

understand that we adjust this on our side out of the cash payment, but I wanted

you to know what I am telling Mr. and Mrs. French about that adjustment.”

      Subsequently, a confidential mediation conference was held. Mr.

Domonoske could not testify as to the parties’ discussions during the mediation

conference because those discussions were confidential. See infra note 10.

      D.     Resolution of Mr. and Mrs. French’s Claims

      Following the mediation conference, Mr. and Mrs. French reached a

settlement with Bank of America9 and signed a Confidential Settlement

Agreement and Release (hereinafter settlement agreement) effective March 1,


      9
        Bank of America signed the release in its own capacity and as successor in
interest to BAC.
                                        - 17 -

2012.10 The settlement agreement states: “The Parties hereto wish to resolve all

disputes between them, asserted or unasserted, related to the Complaint and the

Allegations therein, without admission of any liability.”

      With respect to the loan, Mr. and Mrs. French and Bank of America agreed

“that the terms of * * * [Mr. and Mrs. French’s] mortgage loan shall be

substantially unchanged but that the monthly payments, which are currently

$1,081.55 per month including principal, interest, and escrow, are subject to

increases or decreases necessary to properly maintain the escrow account

otherwise required by law, or allowed by prior agreements of the Parties.” Bank

of America did not change the principal amount of the mortgage that was then due.

Bank of America also agreed to submit a request to all major credit bureaus to

report that Mr. and Mrs. French’s loan account was current and to list the loan

account as current from August 2009 through March 2012.

      10
           The settlement agreement provides:

            The Parties agree to keep the terms of this Agreement and all
      Released Matters confidential. The intent of the confidentiality
      provision of this Agreement is to prevent overt and intentional
      publicity regarding the protected information * * * [D]isclosure of the
      protected information shall be permitted to the extent necessary by
      both Parties * * * to comply with other requirements of law including
      any regulatory authority, court orders, government investigations, or
      subpoenas.
                                       - 18 -

      Under the settlement agreement, Bank of America agreed to pay Mr. and

Mrs. French $62,000 in two payments: (1) a check of $41,333.34 made payable to

them and (2) a check of $20,666.66 made payable to the law firm representing

them. The settlement agreement does not specify whether the $41,333.34 related

to the requested damages, additional damages, or punitive damages. The

settlement agreement does not refer to any personal physical injuries or physical

sickness suffered by Mrs. French. Bank of America reported the settlement

payment of $41,333.34 to Mr. and Mrs. French and the Internal Revenue Service

(IRS) on Form 1099-MISC, Miscellaneous Income.

IV.   2012 Tax Return and Notice of Deficiency

      Mr. and Mrs. French timely filed their 2012 Federal joint income tax return

reporting gross income consisting of wages and taxable Social Security benefits.

They did not report the settlement payment.

      The IRS issued the notice of deficiency for 2012 in this case determining,

among other things, a deficiency arising from the unreported settlement payment

of $41,333.34 that Mr. and Mrs. French had received in 2012. Mr. and Mrs.

French timely filed a petition seeking redetermination of the deficiency. In their

petition they dispute the IRS’ determination that the settlement payment must be

included in gross income.
                                       - 19 -

                                     Discussion

      Generally, the Commissioner’s determination of a deficiency is presumed

correct, and a taxpayer bears the burden of proving it incorrect. See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). With respect to any relevant

factual issue, under section 7491(a)(1) the burden of proof may shift to the

Commissioner if the taxpayer produces credible evidence with respect to that issue

and meets other requirements. Mr. and Mrs. French have neither argued that

section 7491(a)(1) applies nor established that its requirements are met. The

burden of proof remains with them.

      Except as otherwise provided, gross income includes income from all

sources. Sec. 61(a). This definition has broad scope, and exclusions from gross

income must be narrowly construed. Commissioner v. Schleier, 515 U.S. 323,

327-328 (1995); United States v. Burke, 504 U.S. 229, 233 (1992); Commissioner

v. Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955).

      Litigation settlement proceeds constitute gross income unless the taxpayer

proves that the proceeds fall within a specific statutory exclusion. Commissioner

v. Schleier, 515 U.S. at 328; Save v. Commissioner, T.C. Memo. 2009-209, 2009

Tax Ct. Memo LEXIS 211, at *3. Mr. and Mrs. French argue that two exclusions
                                         - 20 -

apply in this case: (1) that the disputed debt doctrine applies to $7,500 of the

settlement payment and (2) that section 104(a)(2) applies to the remaining portion.

      This Court recognizes that Mr. and Mrs. French suffered significant distress

as a result of Bank of America’s conduct and threats to foreclose on their

mortgage. However, they have not carried their burden of proving that the

settlement payment was made with respect to a disputed debt or on account of

Mrs. French’s personal physical injuries or physical sickness.

I.    Disputed Debt Doctrine

      Mr. and Mrs. French argue that they may exclude $7,500 of the settlement

payment from gross income under the disputed debt doctrine, also know as the

contested liability doctrine. A taxpayer who has incurred a debt all or a portion of

which is later discharged or forgiven, generally, has realized an accession to

wealth. See United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931). The

rationale of this principle is that the discharge of a debt for less than its face value

accords the debtor an economic benefit equivalent to income. Id.; Cozzi v.

Commissioner, 88 T.C. 435, 445 (1987). Accordingly, when the taxpayer’s

obligation to repay a debt is settled for less than the amount of the face value of

the debt, the taxpayer ordinarily realizes income from the discharge of

indebtedness. Sec. 61(a)(12); see Warbus v. Commissioner, 110 T.C. 279, 284
                                         - 21 -

(1998) (citing Vukasovich, Inc. v. Commissioner, 790 F.2d 1409, 1413-1414 (9th

Cir. 1986), aff’g in part, rev’g in part T.C. Memo. 1984-611). If the debt, or

portion thereof, that is discharged arises from a disputed debt, the amount

discharged does not give rise to discharge of indebtedness income if the taxpayer

disputes the original amount of the debt in good faith and the debt is subsequently

settled. Preslar v. Commissioner, 167 F.3d 1323, 1327 (10th Cir. 1999) (citing

Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir. 1990), rev’g 92 T.C. 1084

(1989)), rev’g T.C. Memo. 1996-543.

      Although Mr. and Mrs. French seek to recharacterize a portion of the

settlement payment as a discharge of the debt owed, the settlement agreement in

this case is devoid of any reference settling their loan for less than its face value.

In the settlement agreement Bank of America agreed to pay to them $62,000 but

did not allocate any portion of this payment to a disputed debt. Mr. Domonoske

testified that Bank of America alleged it could not get BAC to make an adjustment

to the principal balance because BAC was unwilling to admit fault. According to

Mr. and Mrs. French, in lieu of adjusting downward the principal balance on the

loan as part of the settlement, Bank of America rectified the disputed principal

balance by including the disputed amount in their settlement payment.
                                         - 22 -

      However, in the settlement agreement Mr. and Mrs. French and Bank of

America ultimately agreed that the terms of the loan were “substantially

unchanged”. Leading up to the mediation conference, Mr. and Mrs. French and

Bank of America continued to disagree on the amount of the principal balance of

the loan moving forward. In the email dated February 20, 2012, Mr. Domonoske

asserted that the principal balance after the settlement was about $7,500 less than

Bank of America’s calculation. Mr. Domonoske testified that Bank of America

never agreed on the $7,500 difference but decided it was “going to pay * * * [Mr.

and Mrs. French] more than enough for [them] to carve that up however * * *

[they] want.” Nevertheless, after the mediation conference and pursuant to the

settlement agreement, Mr. and Mrs. French remained liable for the full principal

balance specified in the accepted second loan modification agreement. They

therefore did not settle their obligation to repay the loan for less than the face

value of the debt. Accordingly, none of the loan was discharged and the disputed

debt doctrine does not apply in this case. See Warbus v. Commissioner, 110 T.C.

at 284.

      Mr. and Mrs. French alternatively argue that the $7,500 should be excluded

from gross income because it constituted a refund or reimbursement and therefore

was not an accession to wealth. They cite IRS Chief Counsel Advice 200721017
                                       - 23 -

(May 25, 2007) as support for their contention that a refund of an overpayment

made to satisfy a liability is not an accession to wealth. A written determination of

the Commissioner, including Chief Counsel advice, may not be used or cited as

precedent. Sec. 6110(b)(1)(A), (k)(3); see Elbaz v. Commissioner, T.C. Memo.

2015-49, at *8 (“[W]e may not use or cite as precedent IRS Chief Counsel Advice

* * * in deciding this case.”).

      Even so, Mr. and Mrs. French have not shown how the $7,500 portion of the

settlement payment was attributable to a refund or reimbursement. To the extent

they suggest that the $7,500 was a refund of the payments they made to Bank of

America during 2010, the record does not support this contention. The 10

payments Mr. and Mrs. French made to Bank of America from December 29,

2009, to September 28, 2010, totaled $10,672.90, more than the amount they

assert constituted a refund. The Court finds Mr. Domonoske’s testimony credible

that calculating the exact amount of the disputed principal balance was difficult

given Bank of America and BAC’s inability to provide an accurate record of the

accounting on the loan. However, Mr. and Mrs. French have not shown that a

$7,500 portion of the settlement payment constituted a refund or reimbursement

instead of compensatory damages.
                                       - 24 -

II.   Section 104(a)(2)

      The exclusion from gross income upon which Mr. and Mrs. French rely for

the remaining portion of the settlement payment is section 104(a)(2). It provides

that gross income does not include “the amount of any damages (other than

punitive damages) received (whether by suit or agreement * * *) on account of

personal physical injuries or physical sickness”. Sec. 104(a)(2). Congress

intended this exclusion to cover damages that flow from a physical injury or

physical sickness. See H.R. Conf. Rept. No. 104-737, at 301 (1996), 1996-3 C.B.

741, 1041. Emotional distress is not treated as a personal physical injury or

physical sickness, except for damages not in excess of the cost of medical care

attributable to emotional distress. Sec. 104(a) (flush language).

      When damages are received under a settlement agreement, the nature of the

claim that was the actual basis for the settlement determines whether the damages

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

The nature of the claim is typically determined by reference to the terms of 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. 116, 126 (1994),

aff’d in part, rev’d in part, and remanded on another issue, 70 F.3d 34 (5th Cir.

1995). The “key question” is: “In lieu of what were the damages awarded?”
                                        - 25 -

Robinson v. Commissioner, 102 T.C. at 126-127 (quoting Raytheon Prod. Corp. v.

Commissioner, 144 F.2d 110, 113 (1st Cir. 1944), aff’g 1 T.C. 952 (1943)). If the

agreement does not explicitly state which claims the payment was made to settle,

the “dominant reason for [the payor’s] making the payment” is critical. Green v.

Commissioner, 507 F.3d 857, 868 (5th Cir. 2007), aff’g T.C. Memo. 2005-250;

Bent v. Commissioner, 87 T.C. 236, 244 (1986), aff’d, 835 F.2d 67 (3d Cir. 1987).

      The intent of the payor is determined by taking into consideration all of the

facts and circumstances, including the amount paid, the circumstances leading to

the settlement, and the allegations in the injured party’s complaint. Green v.

Commissioner, 507 F.3d at 868. “[T]he nature of underlying claims cannot be

determined from a general release that is broad and inclusive.” Ahmed v.

Commissioner, T.C. Memo. 2011-295, 2011 Tax Ct. Memo LEXIS 291, at *8-*9,

aff’d, 498 F. App’x 919 (11th Cir. 2012).

      The Court first looks to the terms of the settlement agreement to determine

the nature of the claims that was the actual basis for the settlement. Pursuant to

the settlement agreement, Mr. and Mrs. French agreed to a total payment of

$62,000 from Bank of America to settle their case. A portion of that payment,

$20,666.66, was specifically allocated to attorney’s fees. The settlement

agreement, however, does not further allocate the remaining $41,333.34. Instead,
                                       - 26 -

it cross-references the complaint and states that the settlement was intended to

“resolve all disputes between them, asserted or unasserted, related to the

Complaint and the Allegations therein, without admission of any liability.”

Therefore, the Court turns to the complaint to determine the disputes settled

between Bank of America and Mr. and Mrs. French.

      In the complaint Mr. and Mrs. French made six claims for relief, three of

which were equitable claims for relief (i.e., revision of the two modification

agreements, rescission of the accepted second modification agreement, and

estoppel). The remaining three claims for relief were for monetary relief--

damages of $50,000, punitive damages not to exceed $350,000, and additional

damages of $1,000 under 12 U.S.C. sec. 2605(f)(1)(B). For none of these claims

did Mr. and Mrs. French seek compensation for Mrs. French’s personal physical

injuries or physical sickness. The complaint only generally alleged that they

“suffered lost time, inconvenience, distress, [and] fear”, none of which constitute

personal physical injuries or physical sickness. Further, any harm to which the

complaint referred is to both Mr. and Mrs. French.

      At trial Mr. Domonoske, who drafted the complaint, testified why the

complaint did not include allegations of Mrs. French’s personal physical injuries

or physical sickness. Mr. Domonoske testified that in drafting the complaint he
                                        - 27 -

had various goals in mind. He primarily drafted the complaint for the judge and

the defense lawyer to understand what Bank of America would lose in the case

and to motivate Bank of America to engage seriously in mediation to resolve the

case. He also drafted the complaint as efficiently as possible keeping in mind that

as a plaintiff’s attorney he was paid hourly under fee-shifting statutes. Mr.

Domonoske testified that he also sought to preserve Mr. and Mrs. French’s privacy

by not disclosing aspects of their personal life and marriage and Mrs. French’s

medical history in a public record. He testified that trial was the appropriate place

to make disclosures about Mr. and Mrs. French’s private lives, but that in drafting

the complaint he focused on Bank of America’s wrongdoing while protecting Mr.

and Mrs. French’s privacy.

      Nevertheless, Mr. and Mrs. French could have included in the complaint a

claim for damages for Mrs. French’s personal physical injuries or physical

sickness but did not. Although he could not testify as to the parties’ confidential

discussions during the mediation conference, Mr. Domonoske testified that in

seeking monetary damages Mr. and Mrs. French sought to obtain some

compensation for Mrs. French’s personal physical injuries and physical sickness.

Mr. Domonoske relied on the statements in the demand letter to support his

testimony.
                                         - 28 -

      However, the demand letter seeks punitive damages and compensation for

injuries that either are nonphysical or arise from the emotional distress Mr. and

Mrs. French suffered and from the symptoms of that emotional distress. The

demand letter asserted that the demanded cash payment at that time of $197,500

consisted of three parts: “the stress, inconvenience, and lost time caused by the

repeated * * * [Bank of America] misconduct, punitive damages to send a message

that such behavior must never be repeated, and attorney’s fees.” The demand

letter goes on to assert that Bank of America’s conduct caused Mr. and Mrs.

French “tremendous anxiety and stress” and “forced them to spend lots of time

trying to get * * * [Bank of America] to act property” and that Mr. French’s

inability to “protect his wife from this stress then caused great strain on their

marriage”. None of these harms relate to personal physical injuries or physical

sickness. Punitive damages and damages for emotional distress, lost time,

inconvenience, distress, and fear are not excludable under section 104(a)(2). See

sec. 104(a)(2); Stadnyk v. Commissioner, T.C. Memo. 2008-289, 2008 Tax Ct.

Memo LEXIS 287, at *18 (holding that damages for emotional distress,

mortification, and mental anguish were not excludable under sec. 104(a)(2)), aff’d,

367 F. App’x 586 (6th Cir. 2010); Sanford v. Commissioner, T.C. Memo. 2008-

158, 2008 Tax Ct. Memo LEXIS 159, at *10 (“Damages received on account of
                                       - 29 -

emotional distress, even when resultant physical symptoms occur, are not

excludable from income under section 104(a)(2).”).

      Even if the Court were to infer, as Mr. and Mrs. French suggest, that the

intent of Bank of America in making the settlement payment was in part intended

to compensate Mrs. French for personal physical injuries or physical sickness, the

record does not contain sufficient evidence to allow the Court to properly allocate

any portion of the settlement payment to personal physical injuries or physical

sickness. See Green v. Commissioner, T.C. Memo. 2014-23, at *11; Evans v.

Commissioner, T.C. Memo. 1980-142, 1980 Tax Ct. Memo LEXIS 445, at *13.

Not only do the complaint and demand letter seek punitive and emotional distress

damages but the complaint was filed on behalf of both Mr. and Mrs. French.

Therefore, some of the settlement payment was also intended to compensate Mr.

French, and the record does not show what amounts should be allocated between

Mr. and Mrs. French.

      Having found that neither the disputed debt doctrine nor section 104(a)(2)

applies in this case, the Court concludes that the settlement payment reported on

the Form 1099-MISC of $41,333.34 is includible in full in Mr. and Mrs. French’s

gross income for 2012.
                                      - 30 -

      The Court has considered the parties’ arguments and, to the extent not

discussed herein, the Court concludes the arguments to be irrelevant, moot, or

without merit.

      To reflect the foregoing,


                                               Decision will be entered for

                                      respondent as to the deficiency and for

                                      petitioners as to the accuracy-related

                                      penalty under section 6662(a).
