                  T.C. Memo. 2009-162



                UNITED STATES TAX COURT



            EMBLEZ LONGORIA, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 26989-07.             Filed July 2, 2009.


     Beginning in 1988 P suffered discrimination in his
workplace, the apparent results of which included some
physical injuries as late as 1998. In 2002 P sued his
employer in State court alleging discrimination, but
his complaint did not mention the physical injuries.
In 2005 P received a lump-sum award in settlement of
the lawsuit, and the settlement agreement allocated no
portion of the award to physical injuries. On the
advice of a certified public accountant (C.P.A.), P
reported this settlement award on his 2005 Federal
income tax return as non-taxable income pursuant to
I.R.C. sec. 104(a)(2). R determined a deficiency in
P’s Federal income tax for 2005 and an accuracy-related
penalty under I.R.C. sec. 6662(a) on the basis that the
settlement award was not properly excludable from gross
income under I.R.C. sec. 104(a)(2). P petitioned this
Court for redetermination of the deficiency and the
related penalty.

     Held: P’s settlement award is not excludable from
gross income under I.R.C. sec. 104(a)(2), because P
                                   - 2 -

       failed to prove that the settlement award, or any part
       thereof, was received on account of personal physical
       injuries or physical sickness.

            Held, further, P is not liable for the I.R.C. sec.
       6662(a) accuracy-related penalty because P reasonably and in
       good faith relied on the advice of a C.P.A. in reporting the
       settlement award as non-taxable income.



       Joseph M. Pinto, for petitioner.

       Gary J. Merken, for respondent.



                  MEMORANDUM FINDINGS OF FACT AND OPINION


       GUSTAFSON, Judge:     The Internal Revenue Service (IRS)

determined a deficiency of $50,066 in, and an accuracy-related

penalty under section 6662(a)1 of $10,013 on, petitioner Emblez

Longoria’s Federal income tax for 2005.       The issues for decision

are:       (1) whether the $156,667 Mr. Longoria received from the

State of New Jersey in 2005 to settle a lawsuit is excludable

from his gross income under section 104(a)(2); and (2) whether

Mr. Longoria is liable for an accuracy-related penalty under

section 6662(a).       For the reasons set forth below, we hold that

(1) the $156,667 proceeds of the lawsuit settlement was not

properly excludable from Mr. Longoria’s gross income under



       1
      Unless otherwise indicated, all citations of sections refer
to the Internal Revenue Code of 1986 (26 U.S.C.), as amended, and
all citations of Rules refer to the Tax Court Rules of Practice
and Procedure.
                                - 3 -

section 104(a)(2); but (2) Mr. Longoria is not liable for an

accuracy-related penalty under section 6662(a).

                           FINDINGS OF FACT

     This case was tried in Philadelphia, Pennsylvania, on

February 24-25, 2009.   The stipulation of facts filed February

24, 2009, and the attached exhibits are incorporated herein by

this reference.   At the time Mr. Longoria filed his petition, he

resided in Pennsylvania.

History of Discriminatory Practices by the New Jersey
State Police

     For decades the New Jersey State Police has been accused of

discriminatory practices.    In 1975 the U.S. Department of Justice

(DOJ) filed a lawsuit against the New Jersey State Police under

the Civil Rights Act of 1964 and the Equal Opportunity Act of

1972, alleging that the New Jersey State Police overlooked

qualified minority and female applicants for employment.   As a

result of the DOJ’s lawsuit, the New Jersey State Police agreed

in 1975 to a Consent Decree and Order to increase the number of

African-American and Hispanic troopers to 14 percent of the

police force within 5 years.    After 1975, three consent decrees

were entered between the New Jersey State Police and the DOJ.

The decrees mandated that the DOJ supervise the New Jersey State

Police until 1992 to help ensure efforts to increase the

percentage of minority and female troopers to a level consistent

with that of the diverse population of New Jersey.
                                - 4 -

     The 1975 consent decree was dissolved in October 1992.      At

the time of the termination, the New Jersey State Police had

failed to meet the mandate of that decree.    In July 1999 a “Final

Report of the State Police Review Team” (July 2, 1999) concluded

that the New Jersey State Police had made insufficient progress

in the recruitment and hiring of females and minorities since

1992.    The report found that the New Jersey State Police had

little regard for the professional growth and the diversity of

its members.    Furthermore, the report found that the New Jersey

State Police habitually failed to promote minorities and women

and that if a minority or female employee complained of disparate

treatment, the response of the New Jersey State Police was to

delay or else to fail altogether to take the complaint seriously.

Discrimination Against Mr. Longoria

     Mr. Longoria entered the New Jersey State Police Academy in

March 1988 and served as a New Jersey State trooper beginning in

July 1988.    During the course of his career as a New Jersey State

trooper, Mr. Longoria, who is Puerto Rican, complained about

racial discrimination in the workplace.    During his employment he

suffered physical injuries that appear to have been related to

the discriminatory practices by the New Jersey State Police.2


     2
      For purposes of determining the taxability of the settle-
ment proceeds at issue, we need not determine definitively
whether any given injury was in fact the result of discrimina-
tion. Rather, it is sufficient that Mr. Longoria makes a
                                                   (continued...)
                                - 5 -

Injury During Training

     In June 1988 while he was at the State Police Academy,

Mr. Longoria was singled out to participate in a wrestling

training exercise where he was injured when his weapon struck his

rib cage.    He sustained bruised ribs and experienced severe pain.

In another exercise a trooper instructor--who wanted Mr. Longoria

to resign--purposely blocked the doorway of the gas chamber

during a training session, causing Mr. Longoria to excessively

inhale a noxious chemical agent and suffer gagging and burning in

his lungs.   Mr. Longoria was singled out during a swimming

exercise, as many other minority recruits had been in the past,

by being required to swim extra laps while physically exhausted,

which sickened him.

Injury as a Trooper

     After he passed his training and became a New Jersey State

trooper, Mr. Longoria suffered additional injuries as the

apparent direct result of discrimination.   In November 1989 while

Mr. Longoria was out on patrol, he encountered a suspect.     Before

approaching the individual, Mr. Longoria called his station and



     2
      (...continued)
colorable contention that the injuries were the result of
discrimination, since his settlement with the State of New Jersey
could have taken colorable damages into account. For that reason
the subsequent discussion refers to injuries as the apparent
result of the discrimination that Mr. Longoria suffered and does
not attempt to find the extent to which his employer’s discrim-
ination was in fact the proximate cause of the injuries.
                                - 6 -

requested backup.    The station was near Mr. Longoria’s location,

yet no one responded to his call for backup.    As a result,

Mr. Longoria attempted to arrest the individual by himself, and

he injured his back when the suspect resisted arrest.    Had

Mr. Longoria’s backup arrived, the arrest would have been easier,

and it is likely that he would not have been injured.

     In 1998 Mr. Longoria’s locker was top-loaded by a group of

renegade troopers known as “The Phantom” or the “Lords of

Discipline” in retaliation for his complaints.    The renegade

troopers put all of Mr. Longoria’s gear, including his vest,

boots, and leather onto the top shelf to make the locker top-

heavy.    The arrangement had its intended effect when Mr. Longoria

opened the locker, it fell on him, and he injured his back.

     Mr. Longoria experienced additional injury that may have

been made more likely by his having been given substandard duty

assignments as a result of his minority status.    In February 1990

Mr. Longoria was injured when he was sent out to investigate a

wild raccoon sighting, an assignment he received because of his

minority status and which would usually have been handled by a

local animal control officer.    Mr. Longoria was bitten or

scratched by the rabid animal, and the injury required him to

undergo painful rabies shots, causing swelling, nausea, and flu-

like symptoms which resulted in his missing substantial time from

work.    In 1991 Mr. Longoria sustained injury when his patrol
                                 - 7 -

vehicle caught fire.     Like other minority troopers, Mr. Longoria

was assigned a substandard vehicle with high mileage, which he

believes accounts for the fire.     He escaped from the fire but

suffered from smoke inhalation.3

     As a result of these injuries Mr. Longoria sometimes sought

medical attention and required time off.     Mr. Longoria was

allowed sick leave with pay, and the State of New Jersey paid all

of Mr. Longoria’s medical bills.     Mr. Longoria suffered no lost

wages or out-of-pocket medical expenses as a result of his

injuries.

Mr. Longoria’s State Court Lawsuit

         As a result of the discrimination Mr. Longoria had

experienced during his employment, he filed complaints with the

U.S. Equal Employment Opportunity Commission, and he also filed

an action in Federal District Court in 1999 against the State of


     3
      Mr. Longoria also suffered some injuries with a more
attenuated relation to ethnic discrimination: In June 1989 he
was assigned to the Flemington Station and, as a minority State
trooper, became almost a personal caddy to the commander.
Because of his unfamiliarity with the area and the expectations
of the commander that he be in the area of the commander’s
personal residence on patrol, he was involved in an auto accident
while on patrol, injuring his back. No non-minority trooper ever
received this assignment, and Mr. Longoria attributed a higher
risk of accident to this sort of assignment. In May 1990
Mr. Longoria was assigned to an area where he was required to
make arrests on the basis of “profiling” for sexual orientation.
Mr. Longoria believed that this assignment was in retaliation for
his complaints about discrimination. While on that patrol, he
was involved in another auto accident--again, as the result (he
believed) of an increased risk of accident in an unfamiliar
area--and he re-injured his back.
                               - 8 -

New Jersey concerning the discrimination.     The District Court

dismissed the Federal charges on the State’s motion for summary

judgment and dismissed without prejudice the supplemental State

law claim.   Following the dismissal of his State law claim in the

Federal District Court action, in 2002 Mr. Longoria filed a suit

in State court against the State of New Jersey, styled Emblez

Longoria v. State of New Jersey, et. al., No. MER-L-1533-02 (N.J.

Super. Ct. Law Div.).

     On July 29, 2003, Mr. Longoria filed his fourth amended

complaint in that lawsuit.   His highly detailed complaint sets

forth a history of alleged minority hiring practices by the New

Jersey State Police beginning in 1961 and a DOJ lawsuit in 1975

that resulted in a consent degree.     The complaint describes

various alleged workplace incidents directed at some of

Mr. Longoria’s fellow recruits and troopers, as well as incidents

of racial discrimination in the workplace experienced by

Mr. Longoria himself.

     Mr. Longoria’s complaint asked for compensatory and punitive

damages, reasonable attorney’s fees, court costs and interest

thereon, and equitable and injunctive relief based on four

separate counts:   (1) violation of the New Jersey Law Against

Discrimination Act (LAD), N.J. Stat. Ann. secs. 10:5-1 et. seq,

(2) violation of 42 U.S.C. section 1983, a statute allowing a

civil action for deprivation of rights, (3) direct constitutional
                               - 9 -

claims, and (4) violation of the New Jersey Conscientious

Employees Protection Act (CEPA), a whistleblower statute, N.J.

Stat. Ann. secs. 34:19-1 et. seq.   The only enumeration in the

complaint of the damages Mr. Longoria suffered as a result of the

State of New Jersey’s actions appears in paragraph 102 of the

first count:

     As a result of the unlawful retaliation personally
     experienced by Plaintiff, he has suffered loss of income;
     loss of fringe benefits (including but not limited to
     medical benefits, dental benefits, and pension benefits);
     loss of seniority in higher positions; severe mental
     anguish; anxiety; stomach problems; sleep disorder; stress;
     diminution of the quality of his life and other hedonistic
     injury.

In addition to those damages, there are several allegations in

the complaint of fear and emotional distress, as well as

significant stress.   Mr. Longoria’s complaint does not allege

that he experienced physical injuries during his employment as a

result of his discrimination, such as ribs being bruised in a

wrestling exercise, excessive exposure to a chemical agent, smoke

inhalation from a fire, being bitten by a rabid racoon, and back

injury.   His attorney in the discrimination suit, Mr. Buckman,

brought these physical injuries to the attention of the State of

New Jersey during the settlement negotiations, but no evidence

was offered to show that physical injuries were ever mentioned in

writing during the pendency of the State court suit, and

Mr. Longoria made no showing that the State of New Jersey
                              - 10 -

attached any significance to his physical injuries in settling

the case.

     On October 3, 2005, the State of New Jersey and Mr. Longoria

entered into a Release and Settlement Agreement under which

Mr. Longoria would be paid $156,667 by the State of New Jersey

for a release of “all claims and rights which he may have

against” the State of New Jersey.    The settlement agreement did

not allocate the payment of $156,667 to any specific claim or

alleged injury, but we find that none of the award was intended

to compensate Mr. Longoria for lost wages or backpay.   Even when

Mr. Longoria was injured and out on sick leave he received 100

percent of his pay.   Furthermore, any lost wages due to a lack of

promotion were de minimis.   Mr. Longoria testified that he would

have received $800 more per year for being promoted to detective,

but that there was no pay difference between the officer position

he held and the specialist jobs he was interested in.

Paragraph 5 of the settlement agreement provided that the “State

of New Jersey shall issue an IRS 1099 Form with respect to the

consideration paid to” Mr. Longoria.   As agreed in the settlement

agreement, the State of New Jersey paid Mr. Longoria $156,667 in

2005 and issued him a Form 1099-MISC, Miscellaneous Income,

reflecting the settlement payment.
                              - 11 -

Tax Advice From Certified Public Accountant

     Before signing the settlement agreement, Mr. Longoria

discussed with his attorney, Mr. Buckman, the nature of the

settlement and its possible tax implications.    Mr. Buckman

testified that he and Mr. Longoria talked about the settlement

being all for pain and suffering, because that (and not lost

wages) was the essence of Mr. Longoria’s case.    When Mr. Longoria

pressed him about the taxability of the settlement award,

Mr. Buckman instructed Mr. Longoria to consult a tax

professional.   In past years Mr. Longoria had hired return

preparers at a cost of $200 to $250, but Mr. Longoria heeded

Mr. Buckman’s advice and retained a certified public accountant

(C.P.A.) to prepare his 2005 Form 1040, U.S. Individual Income

Tax Return, at a cost of $600.

     The C.P.A. Mr. Longoria retained had been preparing tax

returns for 26 years and testified that he is familiar with the

law concerning the taxability and non-taxability of settlement

awards.4   Mr. Longoria gave the C.P.A. the Form 1099-MISC issued


     4
      Respondent objected to the testimony of the C.P.A. on the
ground that the C.P.A.’s identity was not revealed to him at
least 2 weeks before the trial as was required by the standing
pretrial order. Rather, Mr. Longoria identified the C.P.A. firm
(not the individual accountant) in his pretrial memorandum
received by respondent’s counsel 4 business days before the
trial. However, the C.P.A.’s somewhat illegible signature did
appear on Mr. Longoria’s Form 1040, along with the perfectly
legible name of the accounting firm. Respondent made no
representation of any frustrated attempt to get information from
                                                   (continued...)
                              - 12 -

by the State of New Jersey, his Forms W-2, Wage and Tax

Statement, and other information regarding some expense

deductions.   When he met with the C.P.A., Mr. Longoria did not

have any papers with him regarding the lawsuit or settlement.5

However, Mr. Longoria explained to the C.P.A. that he had been a

party to litigation with the State of New Jersey and had received

an award to settle all his claims, but that the settlement

agreement did not specifically allocate the monetary award among

his claims.   In the process of determining whether Mr. Longoria’s

settlement would be excludable from gross income under section

104(a)(2), the C.P.A. read through section 104(a)(2) of the

Internal Revenue Code and inquired whether the settlement was for



     4
      (...continued)
the accounting firm at any time or to interview the C.P.A. in the
4 days before trial. When he testified, the C.P.A. offered no
new documents as exhibits and made no new allegations that
constituted surprise to respondent, but only corroborated the
testimony of Mr. Longoria himself--except that in one respect
discussed below the C.P.A.’s testimony was unhelpful to
Mr. Longoria (i.e., that Mr. Longoria did not show the settlement
agreement to the C.P.A.). Quite apart from the testimony of any
witness, the Form 1040 itself makes it very clear that
Mr. Longoria did hire a C.P.A. who did prepare a Form 1040 that
reported the settlement proceeds (on “Statement 1” attached to
the Form 1040), and the C.P.A.’s testimony only confirmed that.
In this circumstance we find that the C.P.A.’s testimony should
be admitted.
     5
      The C.P.A. testified that Mr. Longoria did not give him the
settlement agreement or anything from the court during their
meeting, while Mr. Longoria stated that he did. We found the
C.P.A.’s recollection of that detail of the meeting to be more
credible and conclude that Mr. Longoria did not present the
C.P.A. with any paperwork related to the lawsuit and settlement.
                              - 13 -

injury and sickness.   Mr. Longoria confirmed that he had suffered

injury and sickness.   Nonetheless, Mr. Longoria did represent to

the C.P.A. that he was not sure whether the entire settlement was

for his physical injuries or only a portion of it was.   He

informed the C.P.A. that the settlement settled all claims he had

against the State, but the C.P.A. did not inquire as to what the

underlying causes of action were that gave rise to the

settlement.

     When the C.P.A. learned that Mr. Longoria did not have the

settlement agreement with him, the C.P.A. did not require

Mr. Longoria to provide it.   He did not ask for the complaint or

any other documentation relating to the lawsuit.   The C.P.A. made

no attempt to discuss the underlying case with either

Mr. Longoria’s counsel or anyone from the State of New Jersey.

Instead, he simply relied on Mr. Longoria’s representations that

the settlement award was for wrongs that included his physical

injuries and that the settlement agreement made no discernible

allocation of damages.   From those facts, the C.P.A. concluded

that all of Mr. Longoria’s settlement was excludable from gross

income under section 104(a)(2).

     The C.P.A. then prepared Mr. Longoria’s 2005 Form 1040 and

included with it an attached Statement 1, Miscellaneous Income.

Although the C.P.A. had concluded that the settlement award was

non-taxable, and that the award would not have to be reported at
                                - 14 -

all, the C.P.A. proposed that Mr. Longoria report the $156,667

payment received from the State of New Jersey under the

settlement agreement as a non-taxable injury and sickness award

on Statement 1 with his Form 1040.       The C.P.A. testified that he

included the Statement 1 with Mr. Longoria’s Form 1040 because

the settlement payment was a significant item and a Form 1099-

MISC had been issued.     He did not want Mr. Longoria’s Form 1040

to be flagged for audit for failure to include such a substantial

item, and the C.P.A. did not want it to seem as if they were

hiding anything.     Following the C.P.A.’s advice in good faith,

Mr. Longoria included the Statement 1 with his Form 1040 and did

not include any portion of the $156,667 settlement award in his

2005 taxable income.     Mr. Longoria timely filed his 2005 Form

1040.

The Statutory Notice of Deficiency and the Commencement
of This Suit

        The IRS disagreed with Mr. Longoria’s position that the

$156,667 settlement award was excludable from gross income under

section 104(a)(2), and on September 24, 2007, the IRS mailed a

statutory notice of deficiency to Mr. Longoria.      In that notice

the IRS determined a deficiency of $50,066 and an accuracy-

related penalty of $10,013 under section 6662(a) for 2005.

Mr. Longoria timely petitioned this Court on November 23, 2007,

for a redetermination of that deficiency and the accompanying

penalty.     In his petition Mr. Longoria stated that he “does not
                                - 15 -

believe the taxes, interest and penalties claimed are due in

whole or in part because the amount received by [him] is not

considered income in whole or in part under the law.”

                                OPINION

I.   Taxability of Settlement Award

     As a general rule, the IRS’s determinations are presumed

correct, and the taxpayer has the burden of establishing that the

determinations in the notice of deficiency are erroneous.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Section 61(a) provides the following broad definition of the

term “gross income”:    “Except as otherwise provided in this

subtitle, gross income means all income from whatever source

derived”.    Section 61(a) is thus broad in its scope, and

exclusions from gross income must be narrowly construed.

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

     Section 104(a) provides that gross income does not include:

                  (2) the amount of any damages[6] (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 * * *.

         *        *       *       *       *       *       *



     6
      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. Sec. 1.104-1(c), Income Tax Regs.
(26 C.F.R.).
                              - 16 -

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

The legislative history shows that “[i]t is intended that the

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.   Therefore, to be excludable from gross

income under section 104(a)(2), a settlement award must be paid

to a taxpayer on account of physical injury or physical sickness,

which does not include emotional distress or symptoms thereof.7

     Where damages are received pursuant to a settlement

agreement like Mr. Longoria’s, the nature of the claim that was

the actual basis for settlement controls whether those damages

are excludable under section 104(a)(2).   United States v. Burke,

504 U.S. 229, 237 (1992).   Whether the settlement payment is

excludable from gross income under section 104(a)(2) depends on

the nature and the character of the claims asserted in the

lawsuit.   See Bent v. Commissioner, 87 T.C. 236, 244 (1986),

affd. 835 F.2d 67 (3d Cir. 1987); Church v. Commissioner, 80 T.C.


     7
      Although section 104(a)(2) allows damages for pain and
suffering to be excluded from income to the extent of costs paid
for medical care to treat the condition, that provision provides
no benefit to Mr. Longoria, because he suffered no out-of-pocket
medical expenses related to any pain and suffering since the
State of New Jersey paid for all of his medical expenses.
                                - 17 -

1104, 1106-1107 (1983); Glynn v. Commissioner, 76 T.C. 116, 119

(1981), affd. without published opinion 676 F.2d 682 (1st Cir.

1982).    The determination of the underlying nature of the claim

is factual.     Robinson v. Commissioner, 102 T.C. 116, 126 (1994),

affd. in part, revd. in part and remanded on another issue 70

F.3d 34 (5th Cir. 1995); Seay v. Commissioner, 58 T.C. 32, 37

(1972).

     Where there is a settlement agreement, the determination of

the nature of the claim is usually made by reference to the

agreement.    See Knuckles v. Commissioner, 349 F.2d 610, 613 (10th

Cir. 1965), affg. T.C. Memo. 1964-33; Robinson v. Commissioner,

supra at 126.    If the settlement agreement lacks express language

stating the claims that payment was to settle, the intent of the

payor (here, the State of New Jersey) is critical to that

determination.     Knuckles v. Commissioner, supra at 613; see also

Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), affg. per

curiam T.C. Memo. 1960-21.

     It is Mr. Longoria’s position that he suffered physical

injury and sickness as a result of the discrimination and

retaliation to which he was subjected while serving as a New

Jersey State trooper.    As a result, when the State of New Jersey

settled the lawsuit Mr. Longoria had initiated for “all claims

and right he may have against * * * [the State of New Jersey]

including all claims for pain and suffering” (emphasis added),
                              - 18 -

Mr. Longoria took this to be primarily a settlement for the

physical injury and sickness he had sustained.   Therefore,

Mr. Longoria, on advice of a tax professional, concluded that his

settlement award was non-taxable under section 104(a)(2).

     It is respondent’s position that since the settlement

agreement between Mr. Longoria and the State of New Jersey is

silent as to the allocation of the monetary award to certain

damages, Mr. Longoria’s complaint in the suit that gave rise to

the settlement must dictate which claims were at issue and

settled by the agreement.   As none of Mr. Longoria’s claims in

that complaint alleged physical injury or sickness, other than

symptoms attributable to emotional distress, respondent argues

that none of Mr. Longoria’s settlement should be excludable from

his gross income under section 104(a)(2).

     We must reject Mr. Longoria’s position.   The settlement

agreement is essentially silent as to what claims the settlement

intended to satisfy--it settled “all claims and rights which

* * * [Mr. Longoria] may have against * * * [the State of

New Jersey] including all claims for pain and suffering”.     Since

“pain and suffering” is a broad term that includes emotional

distress and its symptoms, the agreement gives no description

that would exclude the damages under section 104(a)(2).   We must

therefore look to Mr. Longoria’s State court complaint to see

whether it states more particular claims (i.e., “physical injury
                               - 19 -

or physical sickness”) that would justify exclusion.   See United

States v. Burke, supra at 237; Church v. Commissioner, supra at

1106-1107.   The claims Mr. Longoria asserted against the State of

New Jersey were for discrimination, retaliation, and civil rights

violations; and the damages Mr. Longoria claimed were:

     loss of income; loss of fringe benefits (including but not
     limited to medical benefits, dental benefits, and pension
     benefits); loss of seniority in higher positions; severe
     mental anguish; anxiety; stomach problems; sleep disorder;
     stress; diminution of the quality of his life and other
     hedonistic injury.

Most of these injuries--loss of income, loss of fringe benefits

(including but not limited to medical benefits, dental benefits,

and pension benefits), and loss of seniority in higher

positions--are non-physical.   And the alleged injuries which are,

in whole or in part, physical–-i.e., severe mental anguish,

anxiety, stomach problems, sleep disorder, stress, diminution of

the quality of his life and other hedonistic injury--arise from

the emotional distress Mr. Longoria suffered and the symptoms of

that distress.   Because section 104(a)(2) and the flush language

of section 104(a) require that, to be excluded from income, any

damages must arise from personal injury or personal sickness

other than emotional distress or the symptoms thereof, we cannot

hold that the damages claims in Mr. Longoria’s complaint were for

the types of injuries whose compensation is meant to be excluded

from income under section 104(a)(2).
                               - 20 -

     Although Mr. Longoria gave credible testimony at trial about

other injuries that were plainly physical--e.g., bruised ribs,

smoke inhalation, animal bite, and back injury--none of these

injuries was alleged in Mr. Longoria’s complaint, and we cannot

find that the State of New Jersey agreed to settle because of

them.   While the settlement agreement does state that the

settlement “releases all claims including those of which * * *

[the State of New Jersey] is not aware”, it was Mr. Longoria’s

burden to prove some discernible allocation between the emotional

distress-type damages that were pleaded in the State court

complaint and the physical injuries about which he testified at

the trial in this case.    Mr. Longoria did not carry that burden.

Without much explanation, Mr. Longoria’s posttrial brief asks us

to allocate one-third of the $156,667 settlement award to

physical injuries and two-thirds to non-physical injuries,

punitive damages, and costs.    Without an evidentiary basis for

such an allocation, we decline to adopt Mr. Longoria’s allocation

or to attempt any other.

     In his posttrial brief Mr. Longoria cites Eisler v.

Commissioner, 59 T.C. 634 (1973), for the proposition that the

Court should use its best judgment in coming up with an

allocation of damages between claims, and that even if a litigant

failed to raise a cause of action in the pleadings or by

amendment thereto, the Court can allocate the settlement to that
                               - 21 -

cause of action if it played a role in effecting the settlement.

Mr. Longoria’s statement of the holding in Eisler is correct, but

his reliance on it is misplaced.

     In Eisler (a case not involving exclusion under

section 104(a)(2)), the Court did in fact find that a claim not

pleaded in the complaint was nonetheless settled by an

unallocated settlement agreement, because the claim was brought

up between the respective parties’ counsels during settlement

negotiation.   However, the Court reached that conclusion only

because it was “satisfied by the testimony of a former officer of

* * * [the defendant in the State court lawsuit], petitioner

himself, and counsel for the respective litigants that both the

stock claim and the threatened negligence claim had real value in

the minds of the litigants * * * when they executed the * * *

Release”.   Id. at 640.   The testimony in Eisler was sufficient

for the Court to determine that the unpleaded claim was

contemplated as part of the settlement.   See also Seay v.

Commissioner, 58 T.C. 32 (1974) (where the negotiators for each

party testified, the taxpayer successfully established that the

nature of claim was for personal injury).   Mr. Longoria offered

no analogous testimony and has not proved the intent of the State

of New Jersey.

     While we find Mr. Longoria’s testimony to be sincere and

find that he suffered discrimination from his employer that
                              - 22 -

apparently led to several physical injuries, the determinative

issue is whether the State of New Jersey intended to compensate

Mr. Longoria for his physical injuries when it paid him the

settlement award.   On the basis of the record before us, we

cannot find that the State of New Jersey placed any importance on

Mr. Longoria’s physical injuries.

     The only relevant testimony Mr. Longoria presented regarding

the State of New Jersey’s intent was that of his attorney in the

State court lawsuit, Mr. Buckman.   Mr. Buckman testified that he

did bring up Mr. Longoria’s physical injuries during his

settlement negotiations with the State’s attorney, Catherine

Tamasik, but he testified that Ms. Tamasik dismissed

Mr. Longoria’s physical injuries as insignificant by saying “well

those are only a handful many years ago, I don’t think a jury

would be that outraged.”   Mr. Buckman also acknowledged that “I

don’t know what [Ms. Tamasik’s] true opinion was” and that since

she contacted him regarding a settlement before he told her about

Mr. Longoria’s physical injuries, one could assume “she already

had an opinion that * * * the case should be settled.”

     Respondent argues that Mr. Longoria’s physical injuries

could not have been part of the lawsuit that was settled because

any such claims would have been barred by the statute of

limitations.   However, Mr. Longoria argues that his injuries were

excepted from the general statute of limitations under the theory
                              - 23 -

of continuing violation.8   We need not reach the question of

whether damages from the physical injuries sustained by

Mr. Longoria were time-barred (as respondent claims) or were

recoverable under a continuing violation theory (as Mr. Longoria

claims).   See Natl. R.R. Passenger Corp. v. Morgan, 536 U.S. 101

(2002) (distinguishing between discrete acts of discrimination

and a continuing violation theory, the Court held that discrete

acts of discrimination, if time-barred, cannot be revived by

other discrete acts of discrimination, even if similar); Caggiano

v. Fontoura, 804 A.2d 1193 (N.J. Super. Ct. App. Div. 2002)

(applying rationale of Natl. R.R. Passenger Corp. v. Morgan,

supra, to an LAD claim under N.J. Stat. Ann. secs. 10:5-1 through

10:5-49 (West 2002 & Supp. 2009)).     Even assuming that recovery

was potentially available in the State court lawsuit for

Mr. Longoria’s physical injuries, Mr. Longoria did not present

any witness from the State of New Jersey to testify as to its

intent, nor did he present any other evidence from which we might

infer the State’s actual intent.   Therefore, we cannot determine



     8
      A continuing violation allows a claim to proceed so long as
at least one of a series of acts, which all together created a
cause of action, fell within the statutory period. New Jersey
applies the continuing violation theory to claims under the New
Jersey Law Against Discrimination, N.J. Stat. Ann. secs. 10:5-1
through 10:5-49 (West 2002 & Supp. 2009). See Wilson v. Wal-Mart
Stores, 729 A.2d 1006 (N.J. 1999).
                               - 24 -

the State of New Jersey’s intentions in settling the lawsuit so

as to make an allocation as the Court did in Eisler.

      The character of the settlement payment hinges ultimately on

the dominant reason of the payor in making the payment.   See Agar

v. Commissioner, 290 F.2d at 284; Fono v. Commissioner, 79 T.C.

680, 696 (1982), affd. without published opinion 749 F.2d 37 (9th

Cir. 1984).   Mr. Longoria did not establish that he received the

$156,667 settlement award, or any identifiable part thereof, from

the State of New Jersey on account of personal physical injuries

or physical sickness.   For that reason we find that the $156,667

is not excludable under section 104(a)(2) from Mr. Longoria’s

gross income for his tax year 2005.

II.   Accuracy-Related Penalty Under Section 6662(a)9

      A.   Mr. Longoria’s Underpayment Was Attributable To a
           Substantial Understatement of Income Tax Under Section
           6662(b)(1) and (d)(1).

      The IRS determined that Mr. Longoria was liable for a

section 6662(a) accuracy-related penalty for 2005 on account of

his failure to report the $156,667 settlement payment as gross

income.    Section 6662(a) and (b)(1) and (2) imposes a 20-percent



      9
      Respondent’s posttrial brief argued that Mr. Longoria had
conceded the penalty because his “petition did not request that
the penalty be redetermined.” Although the petition did not
explicitly plead reasonable cause as a defense to the asserted
accuracy-related penalty, Mr. Longoria’s pretrial memorandum
raised this defense, and respondent made no objection to
Mr. Longoria’s testimony as to his reliance on the advice of a
C.P.A. We hold that this issue was tried by consent.
                               - 25 -

penalty on an underpayment of tax that results either from

negligence10 or disregard of rules and regulations or from a

substantial understatement of income tax.     By definition, an

understatement of income tax is substantial if it exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000.   Sec. 6662(d)(1)(A).

     Mr. Longoria’s understatement of income tax of $50,066

exceeds 10 percent of the tax required to be shown on his

return–-i.e., 10 percent of $72,415–-and is greater than $5,000.

In such a case, the accuracy-related penalty of section 6662(a)

is mandatory--that is, the statute says it “shall be added”--

unless the taxpayer can show that the understatement was due to

“reasonable cause * * * and that the taxpayer acted in good

faith”.   Sec. 6664(c)(1).   Respondent has carried the burden of

production imposed by section 7491(c), leaving Mr. Longoria with

the burden of proving reasonable cause.   See Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).    Therefore,

Mr. Longoria will be liable for the section 6662(a) accuracy-

related penalty unless he can show his substantial understatement




     10
      Negligence is defined as any failure to make a reasonable
attempt to comply with the provisions of the Code. Sec. 1.6662-
3(b)(1), Income Tax Regs. Respondent has not alleged
Mr. Longoria was negligent in excluding the settlement award from
his gross income under section 104(a)(2). Therefore, whether
Mr. Longoria was negligent is a question we need not reach.
                              - 26 -

of Federal income tax was due to reasonable cause and that he

acted in good faith.

     B.   Mr. Longoria Has Shown Reasonable Cause and Good Faith
          Which Excuses Him From the Accuracy-Related Penalty
          Under Section 6662(a).

     The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case

basis, taking into account all pertinent facts and circumstances,

including the extent of the taxpayer’s efforts to assess his or

her proper tax liability; the taxpayer’s education, knowledge,

and experience; and the taxpayer’s reasonable reliance on a tax

professional.   Sec. 1.6664-4(b)(1), Income Tax Regs. (26 C.F.R.).

The extent of the taxpayer’s efforts to assess the proper tax

liability is generally the most important factor.   Id.   Good-

faith reliance on professional advice concerning tax laws may be

a defense to section 6662(a) penalties.   United States v. Boyle,

469 U.S. 241, 250-251 (1985); see also sec. 1.6664-4(b)(1),

Income Tax Regs.   Reliance on professional advice is not an

absolute defense to the section 6662(a) penalty, Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991); but reasonable cause

exists where a taxpayer relies in good faith on the advice of a

qualified tax adviser and the taxpayer provided the adviser with

all necessary and accurate information, see Neonatology
                               - 27 -

Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd.

299 F.3d 221 (3d Cir. 2002).

     Mr. Longoria is not liable for the section 6662(a) penalty

because he reasonably and in good faith relied on the advice of a

tax professional in reporting the settlement payment as non-

taxable income.   Mr. Longoria was aware that his settlement from

the State of New Jersey might have tax implications.     Therefore,

after his own attorney could not advise him as to the tax

consequences of the settlement, he did not simply seek tax advice

from his regular return preparer but rather, at a greater cost,

sought advice from a licenced tax professional, a C.P.A., and

disclosed the settlement payment to him.   Even though

Mr. Longoria did not volunteer the actual settlement agreement to

the C.P.A. (who did not require it), Mr. Longoria did accurately

describe its contents--in particular, explaining that there was

no allocation of the award among his non-physical damages and his

physical injuries.   The C.P.A. testified that Mr. Longoria “made

[it] clear to me that * * * [the settlement agreement] did not go

through the process of identifying how much, if any, of this

award as to what dollars.”   The C.P.A., who claimed to be

familiar with the provisions of section 104(a)(2), never asked

Mr. Longoria for a copy of the complaint in order to ascertain

the underlying causes of action, and we do not presume that
                              - 28 -

Mr. Longoria should have known that the C.P.A. needed it, absent

a request.

     The C.P.A. interviewed Mr. Longoria about the facts of his

lawsuit and settlement, and Mr. Longoria was correct in his

answers.   The C.P.A. asked Mr. Longoria whether he had been

physically injured, and Mr. Longoria replied that he had been.

While these injuries were not the main thrust of the lawsuit that

Mr. Longoria filed and were not mentioned in the complaint, the

injuries were, to Mr. Longoria, part and parcel of the

discrimination that he had suffered, and his answer to the C.P.A.

was correct.   The C.P.A. testified that Mr. Longoria made it

clear to him that “he did not have specific direction as to the

nature of this award, and whether it was all for his personal

injuries or part of it was for his personal injuries”.   Even with

this ambiguity lingering, the C.P.A. did not inquire further into

the nature of the claims Mr. Longoria brought against the State

of New Jersey, but merely concluded that because Mr. Longoria

suffered some physical injury, the entire settlement was non-

taxable.

     At trial the C.P.A. explained his reasoning for excluding

the entire amount of the settlement from Mr. Longoria’s income:

     [I]f they haven’t given you a stipulation, if you did suffer
     these * * * [physical injuries], you’re comfortable saying
     that you suffered injuries and damages, and it was part of
     the overall package, I don’t know how to break it down, so
     we will exclude it.
                               - 29 -

This was erroneous advice.   The C.P.A. should have learned more

about the claims Mr. Longoria asserted in the lawsuit and the

terms of the settlement, and should then have determined whether

there was any basis for allocating any portion of the proceeds to

physical injuries.

     It was not Mr. Longoria’s fault that his C.P.A. did not ask

him more questions or request more documentation regarding the

underlying lawsuit and the relationship of his physical injuries

to it.   We do not blame Mr. Longoria for his C.P.A.’s erroneous

conclusion of law.   See United States v. Boyle, supra at 250

(“Courts have frequently held that ‘reasonable cause’ is

established when a taxpayer shows that he reasonably relied on

the advice of an accountant * * *, even when such advice turned

out to have been mistaken”).

     Respondent insists that Mr. Longoria’s reliance on his

C.P.A.’s advice could not be reasonable because the C.P.A. based

his advice on an unreasonable legal assumption and rendered his

advice after unreasonably relying on the statements of

Mr. Longoria without any further investigation.   We disagree.

“When an accountant or attorney advises a taxpayer on a matter of

tax law, such as whether a liability exists, it is reasonable for

the taxpayer to rely on that advice.”   Id. at 251 (emphasis in

original).   Mr. Longoria sought a C.P.A.’s advice on a

substantive matter of tax law, i.e., whether his settlement
                              - 30 -

payment was taxable.   Therefore, it was reasonable for

Mr. Longoria to rely on that advice, even if the C.P.A. acted

unreasonably in dispensing it.   As the Supreme Court observed,

     Most taxpayers are not competent to discern error in
     the substantive advice of an accountant or attorney.
     To require the taxpayer to challenge the attorney, to
     seek a “second opinion,” or to try to monitor counsel
     on the provisions of the Code himself would nullify the
     very purpose of seeking the advice of a presumed expert
     in the first place.

Id.; cf. sec. 1.6664-4(c)(1), Proced. & Admin. Regs. (“reliance

may not be reasonable or in good faith if the taxpayer knew, or

reasonably should have known, that the advisor lacked knowledge

in the relevant aspects of Federal tax law”).

     On the basis of the record before us, we find that

Mr. Longoria took reasonable steps to ensure that the settlement

agreement was properly reported on his 2005 Form 1040 by seeking

the advice of a C.P.A., and that he followed in good faith the

advice he received from the C.P.A. by reporting the settlement

proceeds on his Form 1040 in the manner that the C.P.A. advised.

He will not be penalized for good-faith reliance on poor advice

from a C.P.A.

                            Conclusion

     Because Mr. Longoria has failed to establish that he

received the $156,667 settlement award, or any part thereof, from

the State of New Jersey on account of personal physical injuries

or physical sickness, we find that the $156,667 is not excludable
                              - 31 -

under section 104(a)(2) from Mr. Longoria’s gross income for tax

year 2005.   However, because Mr. Longoria reasonably and in good

faith relied on the advice of a C.P.A. in reporting the $156,667

settlement award as non-taxable income, we find that Mr. Longoria

is not liable for the 20-percent accuracy-related penalty under

section 6662(a).

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent as to the defi-

                                 ciency and for petitioner as to

                                 the penalty under section 6662(a).
