                                                             [PUBLISH]


              IN THE UNITED STATES COURT OF APPEALS
                                                                 FILED
                       FOR THE ELEVENTH CIRCUIT          U.S. COURT OF APPEALS
                                                           ELEVENTH CIRCUIT
                                                             AUGUST 21, 2000
                                                            THOMAS K. KAHN
                                                                 CLERK
                                No. 99-12407


                          D. C. Docket No. 96-09126


CARL J. FABRY,
PATRICIA P. FABRY,
                                                             Petitioners,

                                    versus


COMMISSIONER OF INTERNAL REVENUE,


                                                             Respondent.




             Appeal from a Decision of the United States Tax Court


                              (August 21, 2000)

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


   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.

                                               2
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 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


   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.

                                                3
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

       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


   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 . . . .”

                                                 4
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.



   6
      See also Henry v. Commissioner, 77 T.C.M. (CCH) 2209 (T.C. 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).

                                                 5
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., 75 S. Ct. 473, 475 (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, 111 S. Ct. 1512, 1519

(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 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,

   7
       See note 1 supra.
   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

                                               6
112 S. Ct. 1867 (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




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.

                                                7
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 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


   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).
   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.

                                                8
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


                                            9
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 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, 112 S. Ct. 1867(1992). In Commissioner v. Schleier, 115 S. Ct.

2159 (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



   14
     In O’Gilvie v. United States, 117 S. Ct. 452 (1996), discussed at note 25 infra, the Court
found that punitive damages were not excludable under IRC § 104(a)(2).

                                               10
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


   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.

                                                11
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 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


   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.

                                               12
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 injury.17 We must look elsewhere for guidance.

   Although the few courts after Schleier that have examined the second prong

   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.

                                                13
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. 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

                                          14
        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. See also Schleier, 515 U.S. at 329 & n.4, 115 S. Ct.
        2159 (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, 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”
        injuries.

Id. at 328 (emphasis added).18

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


   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.

                                               15
physical injury can still be proven to be excludable.

      Furthermore, in Noel v. Commissioner, 73 T.C.M. (CCH) 2178 (T.C. 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 (T.C. 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 (T.C. 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




                                          16
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 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


   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.
   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.

                                                  17
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).


   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.

                                                18
        We disagree. The facts and circumstance approach used by the tax court is

insufficient.23 Its method 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


   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 the payor is also a factor to be considered. See Metzer 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 (T.C. 2000);
Sherman v. Commissioner, 77 T.C.M. (CCH) 2199 (T.C. 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, 117 S. Ct. 452 (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.


                                                 19
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.

   3. The Unique Facts of this Appeal



   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.




                                              20
        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



   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.

                                                 21
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:


   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.

                                                 22
I concur in the result.




                          23
