                         T.C. Memo. 2006-107



                       UNITED STATES TAX COURT



                DEBORAH A. MESSINA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10926-04.              Filed May 16, 2006.



     Deborah A. Messina, pro se.

     Bradley C. Plovan, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following defi-

ciency in, and additions to, petitioner’s Federal income tax

(tax):
                                  - 2 -

                                          Additions to Tax
 Year    Deficiency    Sec. 6651(a)(1)1      Sec. 6651(a)(2)   Sec. 6654(a)
 1994       $60,217       $7,303.95              $6,979.33      $1,513.69

     The issues remaining for decision are:2

     (1) Is petitioner required to include in gross income for

1994 $170,000 paid during that year by the State of Maryland on

account of her successful prosecution of a claim for wrongful

discharge and back wages?     We hold that she is.

     (2) Is petitioner required to include in gross income for

1994 wages totaling $24,170 paid during that year by the State of

Maryland?    We hold that she is.

     (3) Is petitioner required to include in gross income for

1994 wages totaling $6,227 paid during that year by Sportland

Properties, Inc.?     We hold that she is.

     (4) Is petitioner required to include in gross income for

1994 interest totaling $140 paid during that year by the Bank of

Ocean City?    We hold that she is.

     (5) Is petitioner liable for 1994 for the addition to tax

under section 6651(a)(1)?     We hold that she is.

     (6) Is petitioner liable for 1994 for the addition to tax

under section 6654(a)?     We hold that she is.


     1
      All section references are to the Internal Revenue Code in
effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
     2
      Respondent concedes that petitioner is not liable for 1994
for the addition to tax under sec. 6651(a)(2).
                               - 3 -

                         FINDINGS OF FACT

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

     Petitioner’s legal residence was in Berlin, Maryland, at the

time she filed the petition.

     Petitioner successfully prosecuted a claim for wrongful

discharge and back wages (petitioner’s claim) against the State

of Maryland.   Petitioner and the State of Maryland resolved

petitioner’s claim around the end of April 1994 when they entered

into a release and settlement agreement (agreement).   That

agreement provided in pertinent part:

     WHEREAS, Deborah Messina and the State [of Maryland]
     desire to enter into a full and final resolution of the
     issues of the position to which Ms. Messina will be
     restored and the amount of back pay and benefits to be
     awarded, and to avoid litigation of those issues with
     its attendant expense and inconvenience to the parties;

     NOW, THEREFORE, it is hereby agreed between the parties
     that they shall enter into a full and final settlement
     of the issues of reinstatement and back pay and bene-
     fits and dispose completely of those issues, in consid-
     eration of the mutual promises and covenants contained
     herein and other good and valuable consideration as
     hereinafter described, the adequacy of which is hereby
     acknowledged. Accordingly, it is agreed as follows:

          1. In full and complete settlement of these
     matters, the parties agree to abide by the provisions
     set forth in this agreement.

          2. The State agrees to reinstate Deborah Messina,
     as of April 29, 1994, in the position of a Human Ser-
     vices Specialist IV, at Grade 15, Step 6, with the
     Wicomico County Department of Social Services. * * *

        *       *       *        *      *        *       *
                         - 4 -

     5. The State agrees to contribute to Ms.
Messina’s pension retroactively for the time period
from November 12, 1986 to April 29, 1994.

     6. For all purposes, including retirement and/or
pension benefits, Ms. Messina’s benefits will be com-
puted as if she has been in continuous service with the
State from her original entry on duty date.

      7. The State agrees to pay, and Deborah Messina
agrees to accept, in full satisfaction of the back pay
order, the amount of $170,000.00 less taxes due and
owed to the State and federal governments based on
information submitted by Deborah Messina in her W-4
Form. The amount deducted for payment of taxes may be
less than Ms. Messina’s total income tax liability for
1994.

     8. The parties hereby expressly agree that each
party shall bear its own attorneys’ fees.

     9. It is hereby expressly agreed and understood
that no party shall have the right to litigate any of
the matters discussed in the agreement in any court or
tribunal, unless this agreement is alleged to have been
materially breached by the opposing party. In that
event the aggrieved party must give the other party
thirty days notice of the alleged breach and the par-
ties must attempt to resolve any disagreement before
commencing any litigation.

     10. Deborah Messina agrees that she will, and
hereby does, forever and irrevocably release and dis-
charge the State and its officers, directors, employ-
ees, agents, successors, assigns, and representatives,
from any and all claims, demands, charges, debts,
defenses, actions, causes of action, obligations,
damages, or liabilities, whatsoever, which she now has,
or may have, in any way arising from her reinstatement
in the aforementioned Human Services IV position, or
the aforementioned back pay and leave amounts.

   *       *       *       *       *       *       *

     14. The parties agree that this Agreement con-
tains and comprises the entire agreement and under-
standing of the parties, that there are no additional
promises or terms with the agreement between the par-
                               - 5 -

     ties other than those contained herein; and that this
     Agreement shall not be modified except in writing,
     signed by each of the parties hereto.

        *       *       *        *       *       *      *

          16. Deborah Messina has fully discussed the terms
     of this Agreement with her undersigned attorney and has
     fully reviewed them with her attorney. Based upon that
     review and discussion with her counsel, Deborah Messina
     hereby acknowledges that she fully and completely
     understands and agrees to the terms of this Agreement.

     In anticipation of petitioner’s signing the agreement,

William Ober (Mr. Ober), petitioner’s attorney, had discussions

with a representative of the Office of the Attorney General of

the State of Maryland (Maryland Attorney General) concerning Mr.

Ober’s proposal to allow petitioner to claim a higher number of

exemptions in Form W-4, Employee’s Withholding Allowance Certifi-

cate (Form W-4), in an effort to reduce significantly the amount

of Federal and State tax that the State of Maryland was to

withhold from the $170,000 that the State of Maryland agreed to

pay to petitioner under the agreement.   On April 26, 1994, that

representative sent a letter to Mr. Ober (Maryland Attorney

General’s April 26, 1994 letter) with respect to Mr. Ober’s

proposal.   That letter stated in pertinent part:

          This is to confirm our conversation of 4/26/94
     regarding your proposal to allow Mrs. Messina to claim
     a higher number of exemptions on her W-4 Form in order
     to substantially reduce the projected withholding of
     $60,136.

          As we discussed, I spoke to Ellen Coffin of the
     [Maryland] Comptroller’s Office who stated that a State
     employee may claim more exemptions than they actually
                              - 6 -

     have. The Comptroller’s Office does not make an in-
     quiry or judge the number of exemptions but does as a
     matter of policy, forward on a quarterly basis, copies
     of all W-4s that reflect over 10 exemptions to the
     I.R.S. Ms. Coffin further stated that the employee is
     then subject to an inquiry from the I.R.S. that re-
     quests that the employee state the basis for claiming
     these exemptions on their W-4.

          Based upon the above information you have stated
     that your client intends to claim a higher number of
     exemptions than she in fact has in order to substan-
     tially reduce the projected withholding of $60,136. In
     your estimation, the number of exemptions will be well
     above the 2 exemptions that she claimed prior to her
     termination. It is your opinion, based upon advice
     from a tax expert, that the number will be legally
     defensible because it reflects a good faith projection
     of Mrs. Messina’s tax liability. Further, you have
     stated that Mrs. Messina fully understands that her
     claim may subject her to an inquiry by the I.R.S. and
     that there may be negative tax consequences and/or
     penalties because of her decision to claim higher
     exemptions. [Reproduced literally.]

     After having received the Maryland Attorney General’s April

26, 1994 letter, Mr. Ober sent to petitioner by facsimile a

memorandum dated April 28, 1994.   That memorandum stated in

pertinent part:

          Per our telephone conversation of yesterday eve-
     ning, enclosed please find a copy of the latest fax
     transmittal from DHR’s [Department of Human Resources
     of the State of Maryland] attorney which includes a 2-
     page letter [Maryland Attorney General’s August 26,
     1994 letter to Mr. Ober] and a 5-page Release and
     Settlement Agreement [agreement]. If the agreement is
     acceptable to you as is, please sign on the appropriate
     line thereof (the bottom left of page 4 of the agree-
     ment) and fax the page containing your signature back
     to me.

          The arrangement that I have with DHR is that you
     are to report to work on the Eastern Shore tomorrow,
     contingent upon receipt by DHR today of your faxed
                                - 7 -

     signature on the agreement; if we have any changes to
     make in the agreement, we must do so by 2:30 pm today
     (because of my schedule). The check will be issued
     promptly upon execution of a W-4 by you, an event which
     cannot occur until I determine the exact amount of
     exemptions for you to claim. I am certainly motivated
     to make this determination ASAP; as we discussed yes-
     terday, your faxing to me of your last pay stub re-
     flecting year-to-date earnings and withholding will aid
     me in determining the correct number of exemptions to
     claim. Any delay in filling out the W-4 will delay the
     issuance of the settlement check, but will not delay
     your reporting to work, and will not delay the issuance
     of your first paycheck (if the W-4 is filled out prior
     to the end of the current pay period).

          Please let this letter serve as written confirma-
     tion that both Saul and I will be at your complete
     disposal to resolve the tax situation, with no charge
     for our time. In other words, both Saul and I will
     spend as much time as is necessary, with no charge to
     you for our time, to minimize the income taxes you will
     have to pay to the IRS and State for the calendar years
     1986-1994 inclusive.

     After petitioner and a representative of the State of

Maryland signed the agreement, the State of Maryland paid on a

date not disclosed by the record around the end of April 1994

$170,000 ($170,000 settlement) to petitioner “less taxes due and

owed to the State and federal governments based on information

submitted by Deborah Messina in her W-4 Form”, as required by

paragraph 7 of the agreement.   Under a contingency fee agreement

with Mr. Ober that petitioner and Mr. Ober signed around April 6,

1994, petitioner paid him $84,500 out of the $170,000 settlement.

     During 1994, the State of Maryland also paid wages totaling

$24,170 to petitioner.
                               - 8 -

     During 1994, Sportland Properties, Inc. (Sportland Proper-

ties) paid wages totaling $6,227 to petitioner.

     During 1994, the Bank of Ocean City (Ocean City Bank) paid

interest totaling $140 to petitioner.

     The State of Maryland reported to respondent in Form W-2,

Wage and Tax Statement (Form W-2), for 1994 that it paid to

petitioner during that year wages totaling $194,170 (i.e., the

$170,000 settlement and other wages totaling $24,170).

     Sportland Properties reported to respondent in Form W-2 for

1994 that it paid to petitioner during that year wages totaling

$6,227.

     Ocean City Bank reported to respondent in Form 1099-INT,

Interest Income, for 1994 that it paid to petitioner during that

year interest totaling $140.

     Petitioner did not make any estimated tax payments with

respect to her taxable year 1994.   Nor did petitioner file Form

1040, U.S. Individual Income Tax Return (tax return), for that

year.3

     Respondent issued a notice of deficiency (notice) to peti-

tioner for her taxable year 1994.   In that notice, respondent

determined that petitioner has total unreported income of

$200,537 for 1994 consisting of wages totaling $194,170 that the



     3
      Respondent has no record that petitioner filed a tax return
for her taxable year 1994.
                                - 9 -

State of Maryland paid to petitioner, wages totaling $6,227 that

Sportland Properties paid to her, and interest totaling $140 that

Ocean City Bank paid to her.   In the notice, respondent also

determined that petitioner is liable for 1994 for additions to

tax under, inter alia, sections 6651(a)(1) and 6654(a), respec-

tively.4

                               OPINION

     Petitioner bears the burden of proving that the determina-

tions in the notice are erroneous.5      Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

$170,000 Settlement

     It is not clear whether it is petitioner’s position that

none of the $170,000 settlement is includible in her gross income

or that only the $84,500 contingency fee paid to Mr. Ober, her

attorney, is not includible in her gross income.      On brief,

petitioner argues:

     Petitioner clearly did not gain anything from these
     funds; they were simply paid to the attorney, Mr. Ober,


     4
      Respondent also determined in the notice that petitioner is
liable for 1994 for the addition to tax under sec. 6651(a)(2).
See supra note 2.
     5
      Petitioner makes no argument under sec. 7491(a) or (c).
Respondent’s records show that on June 29, 1998, a substitute for
return was posted to the account that respondent maintained with
respect to petitioner for her taxable year 1994. We find that
respondent’s examination of petitioner’s taxable year 1994 began
before July 23, 1998, and that sec. 7491 is not applicable in the
instant case. See Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727.
                             - 10 -

     THROUGH HER. The check for these funds was issued
     jointly to Petitioner AND Mr. Ober; Petitioner did not
     have exclusive control of these funds at any time.
     Further, Petitioner relied upon reasonable sources
     including the Attorney General’s Office and the Comp-
     troller, both of the State of Maryland, and followed
     their instructions regarding how to “pass through”
     these funds to Mr. Ober and not be responsible for
     taxes on the non-income (reference Exhibit 6-P). For
     all the above reasons, these funds cannot be considered
     as income and must be excluded from inclusion in the
     Petitioner’s Gross Income figure for 1994. * * *
     [Reproduced literally.]

     On the record before us, we find that petitioner has failed

to carry her burden of showing that the $170,000 settlement was

paid jointly to petitioner and Mr. Ober.6   In any event, the


     6
      On the record before us, we further find that petitioner
has failed to carry her burden of showing that Exhibit 6-P to
which petitioner refers on brief and which is part of the record
in this case contained “instructions regarding how to ‘pass
through’ these funds to Mr. Ober and not be responsible for taxes
on the non-income”. The exhibit in question is the Maryland
Attorney General’s April 26, 1994 letter to Mr. Ober. That
letter stated in pertinent part:

          This is to confirm our conversation of 4/26/94
     regarding your proposal to allow Mrs. Messina to claim
     a higher number of exemptions on her W-4 Form in order
     to substantially reduce the projected withholding of
     $60,136.

          As we discussed, I spoke to Ellen Coffin of the
     [Maryland] Comptroller’s Office who stated that a State
     employee may claim more exemptions than they actually
     have. The Comptroller’s Office does not make an in-
     quiry or judge the number of exemptions but does as a
     matter of policy, forward on a quarterly basis, copies
     of all W-4s that reflect over 10 exemptions to the
     I.R.S. Ms. Coffin further stated that the employee is
     then subject to an inquiry from the I.R.S. that re-
     quests that the employee state the basis for claiming
     these exemptions on their W-4.
                                                   (continued...)
                              - 11 -

parties stipulated that “Petitioner was paid $170,000 from [sic]

the State of Maryland on account of her successful prosecution of

a claim for wrongful discharge and back wages.”

     Gross income means all income from whatever source derived.

Sec. 61(a).   On the record before us, we find that petitioner has

failed to carry her burden of establishing that the entire amount

of the $170,000 settlement should be excluded from her gross

income.   On that record, we further find that petitioner has

failed to carry her burden of establishing that the $84,500

contingency fee that she paid to Mr. Ober out of the $170,000

settlement should be excluded from her gross income.   Commis-

sioner v. Banks, 543 U.S. 426, 430 (2005) (holding that, as a

general rule, where a litigant’s recovery constitutes income, the

litigant’s income includes the portion of the recovery paid to


     6
      (...continued)

          Based upon the above information you have stated
     that your client intends to claim a higher number of
     exemptions than she in fact has in order to substan-
     tially reduce the projected withholding of $60,136. In
     your estimation, the number of exemptions will be well
     above the 2 exemptions that she claimed prior to her
     termination. It is your opinion, based upon advice
     from a tax expert, that the number will be legally
     defensible because it reflects a good faith projection
     of Mrs. Messina’s tax liability. Further, you have
     stated that Mrs. Messina fully understands that her
     claim may subject her to an inquiry by the I.R.S. and
     that there may be negative tax consequences and/or
     penalties because of her decision to claim higher
     exemptions. [Reproduced literally.]
                               - 12 -

the attorney as a contingency fee).

     On the record before us, we find that petitioner is required

to include in her gross income the entire amount of the $170,000

settlement.

     Petitioner further argues that if the Court were to conclude

that the $170,000 settlement is includible in her gross income,

such settlement

     would be income that should be claimed in each of the
     eight tax years used in the computation and justifica-
     tion of these funds, the period during which they were
     earned. * * * [Reproduced literally.]

As we understand petitioner’s argument, the $170,000 settlement

should be taken into account over an eight-year period, the

approximate period of years to which such settlement for back

wages pertained.

     Section 451(a) provides in pertinent part:

     SEC. 451.    GENERAL RULE FOR TAXABLE YEAR OF INCLUSION.

          (a) General Rule.--The amount of any item of gross
     income shall be included in the gross income for the
     taxable year in which received by the taxpayer, unless,
     under the method of accounting used in computing tax-
     able income, such amount is to be properly accounted
     for as of a different period.

Section 451(b) through (g) and the regulations thereunder pre-

scribe special rules setting forth exceptions to the general rule

in section 451(a).    None of those special rules applies in the

instant case.    For the year at issue, petitioner was, and was

required to be, on the cash method of accounting.
                              - 13 -

     On the record before us, we find that petitioner is required

to include the entire amount of the $170,000 settlement in her

gross income for her taxable year 1994.

Other Income

     The parties stipulated that, in addition to the $170,000

settlement that the State of Maryland paid to petitioner during

1994, during that year:   (1) The State of Maryland also paid her

wages totaling $24,170; (2) Sportland Properties paid her wages

totaling $6,227; and (3) Ocean City Bank paid her interest

totaling $140.   Petitioner advances no argument as to why such

wages and interest should be excluded from her gross income for

1994.

     On the record before us, we find that petitioner is required

to include in her gross income for her taxable year 1994 the

additional wages totaling $24,170 that the State of Maryland paid

to her, the wages totaling $6,227 that Sportland Properties paid

to her, and the interest totaling $140 that Ocean City Bank paid

to her.

Section 6651(a)(1)

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

file a tax return on the date prescribed for filing, unless the

taxpayer proves that such failure to file was due to reasonable

cause and not willful neglect.
                              - 14 -

     We have found that petitioner did not file a tax return for

her taxable year 1994.   In so finding, we rejected petitioner’s

self-serving and uncorroborated testimony that Mr. Ober filed a

tax return for that year on behalf of her.7

     On the record before us, we find that petitioner has failed

to carry her burden of showing that her failure to file a tax

return for her taxable year 1994 was due to reasonable cause and

not due to willful neglect.   On that record, we further find that

petitioner is liable for her taxable year 1994 for the addition

to tax under section 6651(a)(1).

Section 6654(a)

     Section 6654(a) imposes an addition to tax in the case of an

underpayment of estimated tax by an individual.

     We have found that petitioner did not make any estimated tax

payments for her taxable year 1994.8   Although it is not alto-

gether clear, it appears that petitioner may be arguing that she

is not liable for 1994 for the addition to tax under section

6654(a) because she is not required to include in gross income


     7
      Although petitioner claimed at trial that she had a copy of
the tax return that Mr. Ober allegedly filed on her behalf for
her taxable year 1994, petitioner did not proffer such copy to
the Court. Nor did petitioner provide such copy to respondent.
Moreover, respondent has no record that petitioner filed a tax
return for her taxable year 1994. In fact, respondent prepared a
substitute for return for that year.
     8
      Our finding about petitioner’s failure to make any esti-
mated tax payments for 1994 was based on the parties’ stipula-
tion.
                                - 15 -

for that year any of the $170,000 settlement.   We have found that

petitioner is required to include the entire amount of that

settlement in gross income for her taxable year 1994.

     On the record before us, we find that petitioner has failed

to carry her burden of showing that any of the exceptions in

section 6654(e) applies.9   On that record, we further find that

petitioner is liable for her taxable year 1994 for the addition

to tax under section 6654(a).

     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, and/or moot.

     To reflect the foregoing and the concession of respondent,


                                     Decision will be entered for

                                respondent except with respect to

                                the addition to tax under section

                                6651(a)(2).




     9
      Petitioner failed to present evidence, and does not argue,
that any of the exceptions in sec. 6654(e) applies.
