                  T.C. Summary Opinion 2001-190



                     UNITED STATES TAX COURT



               ROBERT HENRY LEHMUTH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12325-00S.                 Filed December 28, 2001.



     Robert Henry Lehmuth, pro se.

     James J. Posedel, for respondent.



     WOLFE, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.    Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in
                               - 2 -

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.   Petitioner resided in

Orange, California, at the time the petition was filed.

     Respondent determined a deficiency of $4,056 in petitioner’s

1998 Federal income tax.   After a concession,1 the issues for

decision are:   (1) Whether the amounts petitioner actually or

constructively received in settlement of a suit for unpaid

overtime wages constitute gross income to petitioner, and (2) if

so, whether petitioner constructively received a portion of the

settlement proceeds that his attorney did not remit to him.

Background

     Prior to the year in issue, petitioner was employed as a

laboratory manager (lab manager) by Kits Camera, Inc. (Kits).2

In June 1997, petitioner, along with five other individuals,

filed a class action lawsuit in the Superior Court for the State

of California for the County of Orange against Kits for damages

for failure to pay overtime compensation and for failure to pay



     1
      Petitioner concedes that he is liable for the 10-percent
additional tax under sec. 72(t) of $41 for an early distribution
of $414 from a retirement account.
     2
      At some point during or prior to 1998, Kits Camera, Inc.,
changed its name to Kits Sunset, Inc.
                                - 3 -

earned wages.   Petitioner was represented by James S. Davis (Mr.

Davis).    The class potentially involved at least 17 individuals

who had been employed as lab managers by Kits.   Before the class

action lawsuit was certified, Kits settled with two of the lab

managers, petitioner and Ernesto Sanchez (Mr. Sanchez), both of

whom were represented by Mr. Davis.

     At the time of the settlement, Mr. Davis also represented

former store managers employed by Kits in a similar but separate

lawsuit pending against Kits (the store manager case).   The

settlement agreement did not preclude Mr. Davis from continuing

his representation of the store managers.   The settlement

agreement did require petitioner and Mr. Sanchez to release all

of their claims against Kits.   In a paragraph captioned “RELEASE

OF ALL CLAIMS AND LIABILITIES”, the settlement agreement provides

in part:

     the Plaintiffs * * * hereby irrevocably and
     unconditionally release, acquit and forever discharge
     Defendants * * * from any and all charges, complaints,
     claims, liabilities, obligations, promises, agreements,
     controversies, damages, actions, causes of action,
     suits, rights, demands, costs, losses, debts and
     expenses * * * of any nature whatsoever * * *.

In a paragraph captioned “CASH PAYMENT”, the settlement agreement

provides in part:

     Upon performance of all other terms of the settlement,
     payment will be made to Plaintiffs by way of check,
     payable to the “James S. Davis Client Trust Account” in
     the amount of Forty-five Thousand Dollars ($45,000); of
     this amount Plaintiff Robert Lehmuths [sic] is to
     receive $15,000, Plaintiff Ernesto Sanchez is to
                              - 4 -

     receive $15,000 and their attorney will receive $15,000
     in attorneys’ fees and costs.

Mr. Davis signed the settlement agreement on behalf of petitioner

and Mr. Sanchez on August 5, 1998.    On the same day, Mr. Davis

drafted a letter to petitioner and Mr. Sanchez, stating in part:

     With great pleasure I enclose for each of you a check
     in the sum of $12,500.00 which is the partial payment
     you are do [sic] from the Lab Managers Case. You each
     have an additional $2,500.00 coming from costs to be
     recovered. You also are participants in the Store
     Manager Case.

          *      *      *      *        *      *      *

     As to the Store Manager Case, I don’t know how long it
     will take to settle, but I’ll be pushing it as much as
     possible. We can still add Store Managers and you can
     talk to them about their case, just not yours.

Petitioner received the $12,500 check from Mr. Davis and promptly

deposited it in 1998.

     After receiving and depositing the check for $12,500,

petitioner asked Mr. Davis to send him the remaining $2,500.    Mr.

Davis denied the request and informed petitioner that he had

withheld $2,500 from both petitioner and Mr. Sanchez to help

cover the costs of the store manager case in which they were

participating, and that they would receive their $2,500 when the

store manager case was resolved.   Contrary to Mr. Davis’s

comments, petitioner was barred from participating in the store

manager case by the unequivocal terms of the settlement

agreement.
                               - 5 -

     Mr. Davis and petitioner never entered into a written

agreement permitting Mr. Davis to retain the $2,500 at issue.

Petitioner made several requests to Mr. Davis for his $2,500

between the date of the settlement agreement and the date of

trial, but Mr. Davis never sent the money to petitioner.

     Petitioner failed to report any of the settlement proceeds

on his 1998 Federal income tax return.   On September 6, 2000,

respondent mailed to petitioner a notice of deficiency in which

respondent determined a deficiency of $4,056 in petitioner’s

Federal income tax for 1998.   Respondent determined that

petitioner failed to include as income the entire $15,000 of the

settlement proceeds.

     Respondent contends that the settlement proceeds are taxable

to petitioner.   Respondent’s position is that the full amount of

the $15,000 proceeds to which petitioner is entitled is

includable in petitioner’s gross income for 1998 because

petitioner actually received $12,500 and constructively received

$2,500 during that year.3



     3
      We note that respondent might have raised an argument that
petitioner should include in income his pro rata share (1/2) of
the attorney’s fees paid to Mr. Davis. See Benci-Woodward v.
Commissioner, 219 F.3d 941 (9th Cir. 2000), affg. T.C. Memo.
1998-395; Kenseth v. Commissioner, 114 T.C. 399, affd. 259 F.3d
881 (7th Cir. 2001). However, respondent did not raise this
issue, and we do not consider it. This Court repeatedly has held
that we do not consider issues that have not been pleaded. See
Foil v. Commissioner, 92 T.C. 376, 418 (1989), affd. per curiam
920 F.2d 1196 (5th Cir. 1990); Markwardt v. Commissioner, 64 T.C.
989, 997-998 (1975) (and cases cited therein).
                                 - 6 -

Discussion

     Section 61 provides that all income, from whatever source

derived, is includable in gross income unless specifically

excluded by another provision.     Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 430 (1955).    Compensation for services is

specifically included in the definition of gross income.    Sec.

61(a)(1); see also Commissioner v. Smith, 324 U.S. 177, 181

(1945) (“any economic or financial benefit conferred on the

employee as compensation” is includable in taxable income,

whatever the form or mode by which it is effected).    With respect

to damages, “‘whether a claim is resolved through litigation or

settlement, the nature of the underlying action determines the

tax consequences of the resolution of the claim.’”     Milenbach v.

Commissioner, 106 T.C. 184, 198 (1996) (quoting Tribune Publg.

Co. v. United States, 836 F.2d 1176, 1177 (9th Cir. 1988)).      In

characterizing the settlement payment for tax purposes, we ask:

“‘In lieu of what were the damages awarded?’” Id. (quoting

Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110, 113 (1st Cir.

1944), affg. 1 T.C. 952 (1943)).

     The settlement here in question resolved petitioner’s

lawsuit against Kits for its failure to pay petitioner overtime

compensation or wages.   The proceeds of the settlement were paid
                                - 7 -

in lieu of compensation for services and therefore constitute

gross income to petitioner.

     Petitioner states in the petition:     “I was NEVER a 1099

employee (independent contractor); wages earned were earned as a

W2 employee.    * * * These wages-–as an employee–-should have had

all taxes withheld.”   Petitioner also argues that because he

allegedly did not receive a Form W-2 or a Form 1099 with respect

to the settlement proceeds, the proceeds are exempt from Federal

income tax.

     Petitioner’s initial argument, presented in general form in

the petition, was that his former employer should have paid him

overtime compensation timely and should have withheld Federal

income tax from the timely payment.     Petitioner argued that,

consequently, his former employer is responsible for any Federal

income tax now due on the settlement payment in lieu of overtime

compensation.   Since petitioner did not pursue this argument at

trial, we conclude that petitioner has abandoned it.     See

Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7 (1976).       In any

event, we reject the argument as without merit.     As for

petitioner’s alleged nonreceipt of a Form W-2 or a Form 1099, the

law is well settled that the nonreceipt of either form does not

excuse a taxpayer from the duty to report income, Deas v.

Commissioner, T.C. Memo. 2000-204 (and cases cited therein), and

that failure to receive either form does not justify a taxpayer
                               - 8 -

in excluding from gross income the amounts that should have been

reported on the form; see, e.g., Neely v. Commissioner, 85 T.C.

934, 952 (1985); Fairchild v. Commissioner, T.C. Memo. 2001-237;

Rivera v. Commissioner, T.C. Memo. 1994-625; Vaughn v.

Commissioner, T.C. Memo. 1992-317, affd. without published

opinion 15 F.3d 1095 (9th Cir. 1993).    Petitioner has failed to

show that the settlement proceeds fall within the purview of any

provision of the Code or of law excluding them from gross income.

Therefore, the $12,500 that he actually received from Mr. Davis

is includable in his gross income.

     We now address the $2,500 settlement payment to which

petitioner was entitled, but which he never actually received.

     A taxpayer who reports income under the cash method of

accounting must report income for the taxable year when actually

or constructively received.   Sec. 1.451-1(a), Income Tax Regs.

     Income * * * is constructively received by * * * [a
     taxpayer] in the taxable year during which it is
     credited to his account, set apart for him, or
     otherwise made available so that he may draw upon it at
     any time, or so that he could have drawn upon it during
     the taxable year if notice of intention to withdraw had
     been given. However, income is not constructively
     received if the taxpayer’s control of its receipt is
     subject to substantial limitations or restrictions. * *
     *

Sec. 1.451-2(a), Income Tax Regs.    Under the constructive-

receipt doctrine, a taxpayer recognizes income when the taxpayer

has an unqualified, vested right to receive immediate payment.

Martin v. Commissioner, 96 T.C. 814, 823 (1991).    “Generally,
                                 - 9 -

there must be an amount that is immediately due and owing that

the obligor is ready, willing, and able to pay.”     Childs v.

Commissioner, 103 T.C. 634, 654 (1994), affd. without published

opinion 89 F.3d 856 (11th Cir. 1996).    The amount owed must

either be credited to the taxpayer or set aside for the taxpayer

so that the taxpayer has an unrestricted right to receive it

immediately, and the taxpayer being aware of these facts,

declines to accept the payment.    Id.   The constructive-receipt

doctrine precludes the taxpayer from deliberately turning his

back upon income otherwise available.     Martin v. Commissioner,

supra.

     The determination whether a taxpayer has constructively

received income is essentially a question of fact.     Childs v.

Commissioner, supra at 654.    We have long held that the doctrine

of constructive receipt is to be applied sparingly.    The doctrine

is only to be invoked when the taxpayer has an unrestricted right

to receive payment of money that is available to him.

Furstenberg v. Commissioner, 83 T.C. 755, 792-793 (1984); Basila

v. Commissioner, 36 T.C. 111, 115-116 (1961) (citing Gullett v.

Commissioner, 31 B.T.A. 1067, 1069 (1935)).

     Generally, receipt of payment by an agent is constructive

receipt by the principal.     Md. Cas. Co. v. United States, 251

U.S. 342, 346-347 (1920); Burkes v. Commissioner, T.C. Memo.

1998-61.   An exception to the general rule exists if there is an
                                 - 10 -

unauthorized use of funds from which the principal derives no

benefit.    Alsop v. Commissioner, 290 F.2d 726, 728 (2d Cir.

1961), affg. 34 T.C. 606 (1960); Grant v. Commissioner, T.C.

Memo. 1995-29, affd. on another issue 103 F.3d 948 (11th Cir.

1996).     However, if the principal derives an economic benefit

from the agent’s actions, the principal constructively receives

the income even though the agent took unauthorized action to the

detriment of the principal.     Sowell v. Commissioner, 302 F.2d

177, 179-180 (5th Cir. 1962), revg. T.C. Memo. 1961-115; Wells v.

Commissioner, T.C. Memo. 1967-154.

     Mr. Davis, as petitioner’s attorney, was acting as

petitioner’s agent when he properly received the settlement

proceeds from Kits.     See Estate of Kamm v. Commissioner, 349 F.2d

953, 956 (3d Cir. 1965), affg. T.C. Memo. 1963-344.     Therefore,

in the absence of an exception to the general rule, the money

received by Mr. Davis was constructively received by petitioner.

     Petitioner asserts that he did not authorize Mr. Davis to

retain any portion of the $15,000 to which petitioner was

entitled pursuant to the settlement agreement.     He also states

that he never expressed to Mr. Davis an interest in either

participating or investing in the store manager case.     After

receiving the $12,500 check, petitioner asked Mr. Davis on

several occasions to send him the remaining $2,500, but he never

received these funds.     Mr. Davis responded to petitioner’s
                                - 11 -

requests by telling petitioner that his money was being used to

cover the costs in the store manager case.    Petitioner’s requests

for the $2,500 balance of the settlement due to him all were

oral.    He never wrote to Mr. Davis to request payment of these

funds.

     Mr. Davis asserts that petitioner agreed that he should

retain $2,500 of the amount due to petitioner from settlement of

the lab manager case to help fund the litigation of the store

manager case.    Mr. Davis explained that he was “ready, willing

and able” to send petitioner his $2,500 if petitioner sent him a

letter requesting the money and a release of any claim for

compensation for assisting with the store manager case.    Mr.

Davis acknowledges that he and petitioner never entered into a

written agreement allowing Mr. Davis to retain the $2,500 due to

petitioner.

     The record here shows that petitioner was entitled to a

settlement payment of $15,000 and that the entire amount was paid

to petitioner’s attorney, Mr. Davis.     The attorney paid $12,500

to petitioner and retained $2,500.    He explained to petitioner

that petitioner had “an additional $2,500 coming from costs to be

recovered” and that petitioner was a participant in the store

manager case.    At the time of this explanation, the entire

$15,000 amount already had been paid to the attorney.    The

settlement agreement included a general release of all
                                - 12 -

petitioner’s claims against Kits.    He was not permitted to

participate in the store manager case.

     Mr. Davis explained many of the circumstances of his

dealings with petitioner and of his litigation against Kits in an

effort to show that he retained the funds in question with

petitioner’s consent and for his benefit.    We are not convinced

by these arguments.    Mr. Davis was an experienced attorney at the

time in question.   If the facts were as he represented, he could

have sent the entire $15,000 to petitioner and requested the

return of $2,500 for whatever legitimate purpose he had in mind.

Alternatively, he could have obtained petitioner’s written

agreement to his retaining $2,500.    He did neither.   Instead, he

paid only $12,500 to petitioner and offered a questionable

explanation for retaining the balance.

     We conclude that petitioner did not constructively receive

the $2,500 that Mr. Davis retained and never sent to petitioner.

Petitioner did not authorize Mr. Davis to retain the $2,500.

Petitioner’s attempts to obtain the money were unsuccessful.     The

money simply was not available to him.    Moreover, petitioner

received no economic benefit from Mr. Davis’s unilateral decision

to retain the money.   There was no possibility that petitioner

could benefit from participating in the store manager case

because the settlement agreement with respect to the lab manager

case and the general release included in that settlement barred
                                 - 13 -

petitioner from participating in the store manager case.

Consequently, authorities such as Sowell v. Commissioner, supra,

and Wells v. Commissioner, supra, finding constructive receipt

where the principal enjoyed an economic benefit notwithstanding

the absence of authorization by the principal, are not

applicable.

     Petitioner received $12,500 in settlement of his claim

against Kits in 1998, but the additional $2,500 paid to his

attorney for him was not available to him and was not

constructively received by him.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155.
