                            T.C. Summary Opinion 2017-49



                            UNITED STATES TAX COURT



                LIUDMELA OKSANA MACIUJEC, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 18844-15S.                            Filed July 12, 2017.



      Liudmela Oksana Maciujec, pro se.

      Jeremy J. Eggerth, Miles D. Friedman, and Hans Famularo, for respondent.



                                 SUMMARY OPINION


      GUY, Special Trial Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was

filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by


      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
                                         -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined a deficiency of $23,396 in petitioner’s Federal

income tax for 2013 and an accuracy-related penalty under section 6662(a) of

$4,679. Petitioner filed a timely petition for redetermination with the Court

pursuant to section 6213(a). At the time the petition was filed, petitioner resided

in California.

        After concessions,2 the issues remaining for decision are whether petitioner

(1) may exclude from gross income damages of $72,000 that she received in the

settlement of a civil suit that she brought against Home Depot, U.S.A., Inc. (Home

Depot), and (2) is liable for an accuracy-related penalty under section 6662(a).




        1
        (...continued)
Code, as amended and in effect for 2013, and Rule references are to the Tax Court
Rules of Practice and Procedure. Monetary amounts are rounded to the nearest
dollar.
        2
       Respondent conceded that petitioner was not obliged to include in gross
income $32,500 that Home Depot paid to her attorney and $210 characterized in
the notice of deficiency as interest income. Petitioner conceded that she received,
and failed to report, ordinary dividend income of $15. To the extent not discussed
herein, other issues are computational and flow from our decision in this case.
                                        -3-

                                    Background

      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 graduated from high school and has taken some college level

courses in pursuit of an associate’s degree. Petitioner started working for Home

Depot in 2008. She worked primarily in the garden department assisting

customers and processing special orders. Home Depot terminated petitioner’s

employment in February 2010.

      In June 2011 Michael Portner, petitioner’s attorney, filed a civil complaint

for damages against Home Depot in the Superior Court of the State of California.

The complaint identified 10 causes of action and alleged that in the course of her

employment at Home Depot petitioner was subjected to various forms of

discrimination, harassment, and retaliation, that the company failed to

accommodate her physical disability (an inability to stand for extended periods),

that a coworker had committed a battery on her (unwanted touching and offensive

physical contact), and that she was wrongfully terminated. Each of the 10 causes

of action included an allegation that the conduct of Home Depot and its employees

caused petitioner to suffer emotional distress. The complaint did not allege that

petitioner suffered any physical injury or sickness as a result of the conduct of
                                         -4-

Home Depot or its employees. The complaint requested general damages, an

award for loss of earning, the costs of the lawsuit, attorney’s fees, and punitive

damages.

      On May 16, 2013, petitioner and Home Depot entered into a settlement

agreement and general release (settlement agreement) to “fully and finally * * *

resolve” the allegations in the complaint as well as “any and all other claims or

disputes, whether known or unknown, that have been made or could have been

made by or on behalf of the Employee against Home Depot relating to conduct or

events occurring at any time prior to and including the date on which this

Agreement is executed.” The settlement agreement stated in relevant part that

“Home Depot agrees to pay the Employee, as payment for Employee’s claims of

compensatory damages (including emotional distress), the sum of * * * $72,000”

and that the settlement agreement “contains the entire agreement and

understanding between the Employee and Home Depot * * * and supersedes all

other agreements between the Employee and Home Depot”. Finally, the

agreement states: “Employee has not sought medical treatment or incurred

medical costs * * * as a result of the claims asserted in this lawsuit.” No portion

of the settlement payment was allocated to any particular cause of action in the

complaint.
                                        -5-

      Home Depot issued to petitioner a Form 1099-MISC, Miscellaneous

Income, reporting that she had received taxable income of $104,500 in 2013 as a

result of the settlement of the lawsuit described above.

      Petitioner hired Rudy Baron, a certified public accountant, to prepare her

Federal income tax return for 2013. She provided Mr. Baron with copies of the

Home Depot complaint and the settlement agreement, and she specifically

inquired whether he believed that the settlement payment constituted taxable

income.

      Mr. Baron prepared and filed a Federal income tax return for petitioner

reporting that she received wage income of $8,000 from Home Depot. The tax

return did not report as gross or taxable income the miscellaneous income that

Home Depot had reported on Form 1099-MISC. Instead, Mr. Baron included with

petitioner’s tax return (1) a schedule indicating that she had received other income

of $104,500 from Home Depot and (2) a separate statement that she had sustained

“sexual abuse injuries” at Home Depot, and, therefore, she considered the

settlement payment to be nontaxable under section 104(a).
                                        -6-

                                     Discussion

      As a general rule, the Commissioner’s determination of a taxpayer’s liability

in a notice of deficiency is presumed correct, and the taxpayer bears the burden of

proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). Under certain circumstances, the burden of proof with

respect to relevant factual issues may shift to the Commissioner under section

7491(a). Inasmuch as the facts that are relevant to the disposition of this matter

are not in dispute, we conclude that the placement of the burden of proof is

immaterial.

      Unless a specific income exclusion applies, a taxpayer is required to include

in gross income all income from whatever sources derived. See sec. 61(a); Arnett

v. Commissioner, 126 T.C. 89, 91 (2006), aff’d, 473 F.3d 790 (7th Cir. 2007).

Exclusions from income are construed narrowly, and taxpayers must bring

themselves within the clear scope of the exclusion. Id. at 91-92.

      Section 104(a)(2) provides the general rule that gross income does not

include the amount of any damages received on account of a personal physical

injury or physical sickness. The so-called flush language of section 104(a)

provides in pertinent part: “For purposes of paragraph (2), emotional distress shall

not be treated as a physical injury or physical sickness. The preceding sentence
                                         -7-

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.” As explained in related regulations, although

emotional distress is not considered a physical injury or physical sickness,

damages for emotional distress attributable to a physical injury or sickness are

excluded from gross income under section 104(a)(2). Sec. 1.104-1(c), Income Tax

Regs.

        Where damages are received pursuant to a settlement agreement, the nature

and character of the underlying claim guides the Court’s decision whether the

payment is excludable from income under section 104(a)(2). See United States v.

Burke, 504 U.S. 229, 237 (1992); Simpson v. Commissioner, 141 T.C. 331, 339-

340 (2013), aff’d, 668 F. App’x 241 (9th Cir. 2016). In short, petitioner must

show that the Home Depot settlement payment was in lieu of damages for a

physical injury or physical sickness. See Ahmed v. Commissioner, T.C. Memo.

2011-295, aff’d, 498 F. App’x 919 (11th Cir. 2012).

        Petitioner contends that the damages that she received for emotional distress

are attributable to a physical injury (battery) arising during her employment at

Home Depot. We disagree.
                                         -8-

      The complaint that petitioner filed against Home Depot does not include an

allegation that she suffered any physical injury or physical sickness as a result of

the conduct of Home Depot or its employees. The complaint states that as a

proximate result of the actions underlying the complaint petitioner suffered “loss

of income, wages and other pecuniary losses” and “mental anguish,

embarrassment, humiliation, and emotional distress”.

      Although petitioner may have suffered physically as a result of the battery

described in the complaint, there is no indication in the settlement agreement or in

the record as a whole that she was compensated for a physical injury or physical

sickness, or emotional distress attributable thereto. Petitioner does not claim that

any portion of the settlement payment served to reimburse her for amounts paid

for medical care attributable to emotional distress.3 See sec. 104(a) (flush

language); Sanford v. Commissioner, T.C. Memo. 2008-158. Damages received

on account of emotional distress and resultant symptoms are not excludable from

income under section 104(a)(2). Hawkins v. Commissioner, T.C. Memo. 2005-

149. In sum, we conclude that petitioner did not receive damages for emotional

distress that were attributable to a physical injury or physical sickness and,

      3
        In fact, the settlement agreement states that “[e]mployee has not sought
medical treatment or incurred medical costs * * * as a result of the claims asserted
in this lawsuit.”
                                        -9-

accordingly, the portion of the settlement payment remaining in dispute is not

subject to exclusion from gross income under section 104(a)(2). See Sanford v.

Commissioner, T.C. Memo. 2008-158; Shaltz v. Commissioner, T.C. Memo.

2003–173.

      We also redetermine respondent’s determination that petitioner is liable for

an accuracy-related penalty pursuant to section 6662(a). Section 6662(a) and

(b)(1) and (2) imposes a penalty equal to 20% of any underpayment due to

negligence or intentional disregard of rules and regulations or a substantial

understatement of income tax. Negligence is a lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under the

circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985). An

understatement of income tax is “substantial” if the understatement exceeds the

greater of 10% of the tax required to be shown on the return or $5,000. Sec.

6662(d)(1)(A). Respondent bears the burden of production with respect to the

penalty. Sec. 7491(c).4

      However, section 6664(c) provides that no penalty shall be imposed with

respect to any portion of an underpayment if it is shown that there was reasonable

      4
        Respondent has satisfied his burden of production inasmuch as the record
shows that the understatement exceeds 10% of the tax required to be shown on the
return, which is greater than $5,000.
                                        - 10 -

cause for such portion and that the taxpayer acted in good faith with respect to

such portion. Swihart v. Commissioner, T.C. Memo. 1998-407. The Court must

consider all the facts and circumstances in determining whether the taxpayer acted

with reasonable cause and in good faith. Sec. 1.6664-4(b)(1), Income Tax Regs.

Generally, the most important factor is the extent of the taxpayer’s effort to assess

her proper tax liability. Id.

      A taxpayer may establish good-faith reliance on a professional tax adviser

by showing that (1) she gave the adviser complete and accurate information, (2) an

incorrect return was the result of the adviser’s mistake, and (3) she believed in

good faith that she was relying on a competent adviser’s advice. See, e.g., Estate

of Goldman v. Commissioner, 112 T.C. 317, 324 (1999), aff’d without published

opinion sub nom. Schutter v. Commissioner, 242 F.3d 390 (10th Cir. 2000).

      Considering all the facts and circumstances, including petitioner’s lack of

sophistication regarding tax matters, we conclude that petitioner has shown

reasonable cause for the entire underpayment and that she acted in good faith in

relying on Mr. Baron’s advice. See, e.g., United States v. Boyle, 469 U.S. 241,

251 (1985) (holding that it is reasonable for a taxpayer to rely on the advice of an

attorney or accountant because “[m]ost taxpayers are not competent to discern

error in the substantive advice of an accountant or attorney”). Consequently, we
                                       - 11 -

do not sustain respondent’s determination of an accuracy-related penalty in this

case.

        To reflect the foregoing,


                                                Decision will be entered

                                      under Rule 155.
