                         T.C. Memo. 2009-143



                       UNITED STATES TAX COURT



                 JON E. HELLESEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8606-05.                Filed June 18, 2009.



     Jon E. Hellesen, pro se.

     Monica D. Gingras, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a $87,422 deficiency

in petitioner’s 1997 Federal income tax and a $21,855.50 addition

to tax under section 6651(a)(1).1   The deficiency arises from



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 2 -

$273,500 of unreported income from settlement proceeds, interest

received, and a State income tax refund.    Petitioner conceded the

deficiency relating to the interest and the State income tax

refund.

     The issues for decision are:    (1) Whether petitioner may

exclude the settlement proceeds received from his gross income

pursuant to section 104(a)(2); and (2) whether petitioner is

liable for an addition to tax under section 6651(a)(1) for his

failure to timely file a return.    We hold that the settlement

award is not excludable from gross income and petitioner is

liable for the failure to file addition to tax under section

6651(a)(1).

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    Petitioner resided in

California at the time of filing his petition with this Court.

     Petitioner was employed as a claims litigation attorney by

State Farm Insurance Co. (State Farm) from April 1988 through

August 12, 1994.   Petitioner’s wife, Beverly Harlan (Ms. Harlan),

was also employed as a claims litigation attorney by State Farm

from September 20, 1991, through February 13, 1995.    Petitioner

and his wife jointly filed a lawsuit against State Farm based on

allegations related to their employment and discharge from State
                               - 3 -

Farm.   Petitioner and Ms. Harlan filed the lawsuit on August 8,

1995, and alleged the following seven causes of action:

     (1) Sexual Harassment/Discrimination under Gov. Code §
     12940, et seq. on Behalf of PLAINTIFF BEVERLY HARLAN v.
     [sic] All DEFENDANTS,

     (2) Tortious Discharge In Contravention of Public Policy
     on Behalf of PLAINTIFF BEVERLY HARLAN vs. All DEFENDANTS,

     (3) Negligence on behalf of PLAINTIFF BEVERLY HARLAN vs.
     All DEFENDANTS,

     (4) Negligent Misrepresentation on Behalf of PLAINTIFF
     BEVERLY HARLAN vs. All DEFENDANTS,

     (5) Fraud - Labor Code § 970-972 on Behalf of PLAINTIFF
     BEVERLY HARLAN vs. All DEFENDANTS,

     (6) Tortious Discharge in Contravention of Public Policy
     Behalf of PLAINTIFF JON E. HELLESEN vs. All DEFENDANTS, and

     (7) Negligence on Behalf of PLAINTIFF JON E. HELLESEN vs.
     All DEFENDANTS.

In the complaint petitioner alleged that he had suffered extreme

and severe emotional distress including a lack of concentration,

loss of self-esteem, embarrassment, anxiety, humiliation and

stress.   Petitioner requested general damages.

     In the prayer for relief portion of the complaint petitioner

did not ask for damages resulting from physical injuries or

sickness from emotional distress.   Petitioner asked for general

damages and further relief as the court deemed proper.

     In connection with the lawsuit petitioner was deposed on

September 10, 11, and 12, 1996.   In the deposition petitioner

stated that he was a victim of sexual harassment while working at
                               - 4 -

State Farm and that it caused him to pace and to feel upset,

nervous, and stressed.   Petitioner was able to work after his

termination from State Farm, but physical problems occurred as a

result of the termination.   Petitioner experienced an escalation

in chest pains,2 an aching pain and loss of sensitivity on the

right side of his forehead, increased blood pressure, weight

loss, an upset stomach, irregular bowel movements, headaches, and

emotional instability.

     Petitioner had a single appointment with each of two

physicians, Dr. Raszinski and Dr. Viltuznik, regarding his

physical ailments.   Petitioner did not provide proof of costs

incurred for seeing the two physicians or paying for any sort of

medical care.

     Petitioner saw Dr. Raszinski for his chest pains.   The

doctor instructed petitioner to reduce his stress level and did

not diagnose a heart problem or prescribe him any medication.

Petitioner told Dr. Raszinski that difficulty at work had caused

his stress.

     Petitioner saw Dr. Viltuznik for the pain and loss of

sensitivity over his right eye.   Petitioner told Dr. Viltuznik

“it [area over right eye] seems to be a weakened area on my body

that as stress or upset, feelings build, it goes there.”    On

deposition petitioner did not recall whether Dr. Viltuznik made a


     2
         Petitioner began feeling chest pains in 1993.
                               - 5 -

diagnosis.   Petitioner was referred to another doctor or medical

center for the condition but did not see anyone else about the

condition.   At trial petitioner stated that Dr. Viltuznik had

diagnosed a condition in his head and stated that in 1994 a blood

vessel had burst in his head on the right side.   Petitioner

reported this condition had not improved.

     Petitioner has lost approximately 20 pounds since his

termination by State Farm.   He began having an upset stomach

while working at State Farm.   After his termination petitioner

became more emotional, and an upset stomach became a daily

problem.

     Petitioner and his wife settled their lawsuit with State

Farm on August 19, 1997, for $550,000 less $3,000, the cost of

the arbitrator.   In 1997 petitioner received a check for

$273,500, and in 1997 State Farm reported on a Form 1099-MISC,

Miscellaneous Income, that it paid petitioner $273,500.     In the

Settlement Agreement and General Release (settlement agreement),

a paragraph titled “WITNESSETH” states as follows:

          WHEREAS, CLAIMANTS claim they suffered personal
     physical injuries and sickness, including, but not
     limited to, medial [sic] injuries, costs and treatment,
     resulting from being subjected to sexual harassment,
     wrongful termination and retaliation caused by
     Defendant, resulting in physical disabilities;

The “SETTLEMENT AND RELEASE” portion of the settlement agreement

states as follows:
                                 - 6 -

      Said amount includes all obligations by Defendants to
      CLAIMANTS including, without limitation, severance pay,
      sick pay, and other wages or benefits, and general
      damages for personal physical injuries and sickness,
      including medical costs and treatment incurred therein,
      as well as emotional injuries arising from CLAIMANTS’
      alleged personal physical injuries and sickness from
      alleged sexual harassment, wrongful termination and
      retaliation and all other statutory, tort, contract or
      other claims of any kind.

The settlement agreement does not allocate the portions of the

total amount being paid to settle claims related to sexual

harassment, tortious discharge, negligence, negligent

misrepresentation, and fraud.    Further, there is no allocation of

the portions of the total amount being paid to petitioner and Ms.

Harlan; each received a check for half of the total settlement.

      Petitioner filed his 1997 Federal income tax return on

August 11, 2000.    Petitioner’s Federal tax return for 1997 was

due on August 15, 1998, because petitioner received an extension.

Petitioner did not report any of the settlement proceeds as

income on his 1997 return.

                                OPINION

I.   Deficiency

      A.   Burden of Proof

      Generally, the taxpayer bears the burden of proving the

Commissioner’s deficiency determinations incorrect.    Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    Petitioner has

neither claimed nor shown that he satisfied the requirements of

section 7491(a) to shift the burden of proof to respondent.
                                 - 7 -

Accordingly, petitioner bears the burden of proof.    See Rule

142(a).

     B.    Section 104

     It is well established that, pursuant to section 61(a),

gross income includes all income from whatever source derived

unless otherwise excluded by the Internal Revenue Code.    See

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-431 (1955).

Exclusions from gross income are construed narrowly.

Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995).

          As relevant here, section 104 provides:

     SEC. 104.   COMPENSATION FOR INJURIES OR SICKNESS.

          (a) In General.–-Except in the case of amounts
     attributable to (and not in excess of) deductions allowed
     under section 213 (relating to medical, etc., expenses) for
     any prior taxable year, gross income does not include--

                 *       *   *   *       *   *   *

                (2) 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;

                 *       *   *   *       *   *   *

     * * * For purposes of paragraph (2), emotional distress[3]
     shall not be treated as a physical injury or physical
     sickness. The preceding sentence shall not apply to an




     3
        “[T]he 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.
                                - 8 -

     amount of damages not in excess of the amount paid for
     medical care (described in subparagraph (A) or (B) of
     section 213(d)(1)) attributable to emotional distress.[4]

     “Damages received” means amounts received “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.”   Sec. 1.104-1(c), Income Tax Regs.    In

evaluating whether amounts received pursuant to the settlement

agreement are excludable from income pursuant to section

104(a)(2), we look to the written terms of the settlement

agreement to determine the origin and allocation of the

settlement proceeds.   See Metzger v. Commissioner, 88 T.C. 834

(1987), affd. without published opinion 845 F.2d 1013 (3d Cir.

1988); Jacobs v. Commissioner, T.C. Memo. 2000-59, affd. sub nom.

Connelly v. Commissioner, 22 Fed. Appx. 967 (10th Cir. 2001).

     Petitioner and State Farm entered into a written settlement

agreement before trial.   Petitioner was paid $273,500 to settle

all claims.   Petitioner did not allege a cause of action in the

lawsuit for personal physical injuries or sickness; rather

petitioner claimed general damages resulting from negligence.

There is no allocation of amounts paid to settle physical

injuries and sickness.    However, the amounts petitioner received


     4
        Sec. 104 was amended by the Small Business Job Protection
Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat. 1838, to
provide, effective for amounts received after Aug. 20, 1996, that
the personal injury or sickness for which the damages are
received must be physical.
                               - 9 -

settled all obligations by State Farm to pay petitioner for any

personal physical injuries and sickness arising from alleged

sexual harassment, wrongful termination, retaliation, and all

other statutory, tort, contract, or other claims of any kind.

     If a settlement agreement lacks express language stating

what the settlement amount was paid to settle, we look to the

intent of the payor, on the basis of all the facts and

circumstances of the case, including the complaint filed and

details surrounding the litigation.    United States v. Burke, 504

U.S. 229 (1992); Robinson v. Commissioner, 102 T.C. 116, 127

(1994), affd. in part and revd. in part on another issue 70 F.3d

34 (5th Cir. 1995); Knuckles v. Commissioner, T.C. Memo. 1964-33,

affd. 349 F.2d 610 (10th Cir. 1965).   A key question to ask is

“‘In lieu of what were the damages awarded?’”   Robinson v.

Commissioner, supra at 126 (quoting Raytheon Prod. Corp. v.

Commissioner, 144 F.2d 110, 113 (1st Cir. 1944), affg. 1 T.C. 952

(1943)).

     We have previously addressed factual scenarios where a

settlement has been reached between the parties and there is no

express allocation of an amount of the settlement for physical

sickness and injuries.   See Pettit v. Commissioner, T.C. Memo.

2008-87.   In Pettit, a $240,000 settlement was apportioned as

follows:   $44,250.12 attributed to lost wages; and $195,749.88

attributed to emotional distress, pain and suffering, and other
                                - 10 -

nonwage damages.    The settlement agreement made no allocation to

compensation for a physical injury or physical sickness, and the

Court made no apportionment of any of the settlement proceeds to

a physical injury or physical sickness.     See also Seidel v.

Commissioner, T.C. Memo. 2007-45, affd. without published opinion

103 AFTR 2d 2009-1788, 2009-1 USTC par. 50,370 (9th Cir. 2009)

(written settlement agreement said:      “‘[petitioner] acknowledges

that she considers the payment of the check payable to her

without withholdings to be compensation for personal injury

(i.e., emotional distress) damages only’”, but did not

specifically allocate any portion of the settlement as paid for a

physical injury or physical sickness).      Although petitioner has

stated his impression that in reaching a settlement, State Farm

was very concerned about his physical injuries, petitioner has

not presented any evidence in support of his impression, and we

are not required to accept petitioner’s self-serving testimony.

See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

     Petitioner and his wife alleged seven causes of action in

their lawsuit.     Petitioner did not allege physical injury or

sickness in his complaint, but the settlement agreement is broad

and encompasses all possible causes of action, including physical

injuries.   However, there is no allocation of a specific amount

of the settlement as compensation for physical injuries or

physical sickness.     Without such an allocation, no amount of the
                              - 11 -

settlement may be excluded from income.     Pettit v. Commissioner,

supra; Seidel v. Commissioner, supra.     Petitioner must report the

entire settlement amount as income received in 1997.

II.   Failure To File Addition to Tax

      Section 6651(a)(1) imposes an addition to tax for failure to

file a return when due “unless it is shown that such failure is

due to reasonable cause and not due to willful neglect”.     The

addition equals 5 percent for each month that the return is late,

not to exceed 25 percent in total.     The Commissioner has the

burden of production with respect to the liability of an

individual for an addition to tax under section 6651(a)(1).       Sec.

7491(c).   The burden of showing reasonable cause under section

6651(a) remains on the taxpayer.     Higbee v. Commissioner, 116

T.C. 438, 446-448 (2001).   To show reasonable cause, petitioner

must demonstrate that he exercised ordinary business care and

prudence but nevertheless was unable to file his 1997 Federal

income tax return by the due date.     See United States v. Boyle,

469 U.S. 241, 246 (1985); sec. 301.6651-1(c), Proced. & Admin.

Regs.   Willful neglect is defined as a “conscious, intentional

failure or reckless indifference.”      United States v. Boyle, supra

at 245.

      Petitioner has stipulated that he did not file his 1997

Federal income tax return until August 11, 2000.     Petitioner’s

1997 Federal income tax return was due on August 15, 1998.
                             - 12 -

Respondent accordingly met his burden of production with regard

to the section 6651(a)(1) addition to tax.    See sec. 7491(c);

Higbee v. Commissioner, supra.

     Petitioner has neither offered an explanation for his

failure to timely file his 1997 Federal income tax return nor

produced evidence to establish any reasonable cause for his

failure to timely file this return.    We sustain respondent’s

determination of an addition to tax under section 6651(a)(1).

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, or moot.

     To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.
                                                                      y
