                         T.C. Memo. 2007-224



                       UNITED STATES TAX COURT



                DOUGLAS A. GIBSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13125-05.              Filed August 13, 2007.



     Dwight M. Montgomery, for petitioner.

     Laura A. McKenna, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a $49,778 deficiency

in petitioner’s 2002 Federal income tax and a $9,956 section 6662
                               - 2 -

penalty for 2002.1   After a concession,2 the issues remaining for

decision are (1) whether $175,000 petitioner received during 2002

in connection with a settlement of a lawsuit is excludable from

gross income pursuant to section 104(a)(2), and (2) whether

petitioner is liable for an accuracy-related penalty pursuant to

section 6662.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time he filed the

petition, petitioner resided in Sun City, California.

     In 1991, petitioner’s wife inherited a home in Sun City,

California (the Sun City residence), in the County of Riverside

(the county).   In late 1991, petitioner, his wife, and their

children (the Gibsons) moved into the Sun City residence.

     The Sun City residence was in an area zoned as a “Senior

Citizen Development” (SCD) by the county.   A county ordinance

provided that an SCD zoning restriction placed a certain age-

related residency restriction (the restriction) on persons




     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
     2
        Petitioner conceded that the Social Security benefits he
received during 2002 are taxable.
                                 - 3 -

occupying dwelling units within the SCD.    The Gibsons did not

satisfy the restriction.

     In 1992, the Sun City Civic Association reported the

Gibsons’ restriction violation to county code enforcement

authorities (CCE authorities).    The CCE authorities contacted the

Gibsons several times with regard to the restriction.    On the

first occasion, CCE authorities served notice on the Gibsons

informing them of the restriction and that they were in violation

of the restriction.    Later, CCE authorities issued the Gibsons a

citation stating that they should comply immediately with the

restriction by restricting the occupancy of the home to persons

satisfying the restriction.    CCE authorities advised the Gibsons

that continued violation of the restriction might result in fines

and imprisonment.    Also, CCE authorities issued petitioner a

notice to appear in court, alleging a criminal violation of the

ordinance that imposed the restriction.    The county later dropped

the charge, and petitioner did not have to appear in court.

     Other Sun City residents harassed and physically and

verbally threatened the Gibsons because of their violation of the

restriction.

     In May 1994, the Gibsons and other plaintiffs initiated a

class action lawsuit against the county and certain other county

officials in the U.S. District Court for the Central District of

California.    In the class’s first amended complaint, the class
                               - 4 -

set forth 14 claims:   (1) Violation of the Federal Fair Housing

Act; (2) violation of the California Fair Employment and Housing

Act; (3) violation of the Unruh Civil Rights Act; (4) violation

of Federal substantive due process; (5) violation of California

substantive due process; (6) violation of Federal equal

protection laws; (7) violation of California equal protection

laws; (8) violation of California procedural due process; (9)

violation of California privacy laws; (10) violation of Federal

freedom of association laws; (11) violation of California freedom

of association laws; (12) California inverse condemnation; (13)

California estoppel by nonconforming use rights; and (14)

California estoppel by exceeding zoning authority.   The plaintiff

class incorporated into each of the above-referenced claims

between 38 and 44 paragraphs of additional material.   Paragraph

35 of that additional material alleged bodily injury among nine

other losses suffered by petitioner and members of petitioner’s

class.

     Paragraph 35 states:

     By reason of defendant’s unlawful acts or practices,
     plaintiffs and members of plaintiff class have
     suffered loss of housing, violation of their civil
     rights, monetary damages, humiliation, and bodily
     injury, including but not limited to physical and
     emotional distress. Plaintiffs and members of the
     plaintiff class have also suffered the loss of the
     important social, business, economic, and political
     benefits of associations that arise from living in
     communities integrated with families and children.
                               - 5 -

     In August 2002, the District Court entered a consent decree

in petitioner’s class action lawsuit.     The consent decree granted

declaratory, injunctive, and monetary relief to petitioner and

the other named plaintiffs.   Petitioner, his wife’s estate,3 and

his children received a total of $350,000 in monetary relief, to

be allocated as agreed among them.     The consent decree also

established a fund for the purpose of making distributions to

unnamed plaintiffs who submitted qualified claims.

     Pursuant to the decree, six factors are to be considered in

determining the amount of compensation due to unnamed qualified

claimants.   Those six factors are:    (1) The number of citations

or threats received; (2) the degree of coercion expressed in the

citation or threat or other communication from the county to the

claimant; (3) whether the claimant left the dwelling in question

because of the citation or threat; (4) the nature and degree of

emotional distress suffered, including whether the claimant

provided evidence of any physical symptoms of emotional distress,

or other special circumstances which increased the emotional

distress; (5) whether the claimant provided evidence of any

increased costs resulting from the loss of housing, including,

but not limited to, increased cost of alternative housing, wages

and other income lost during the time spent looking for


     3
        Petitioner’s wife died in 2000, and her estate was
substituted as a party in the class action lawsuit.
                               - 6 -

alternative housing, moving, storage or packing costs, temporary

housing costs, any costs of commuting to and from work in excess

of those that would have been incurred commuting to and from the

denied housing; and (6) whether the claimant provided evidence of

any other compensable loss.

     Petitioner received $175,000 of the $350,000 awarded to him,

his wife’s estate, and his children.   Petitioner engaged an

experienced tax attorney who met with the class action attorneys

to obtain all the pertinent facts and circumstances.   After

reviewing the information, the tax attorney advised petitioner to

report $12,500 of the $175,000 as “other income” and to label it

“damages” on petitioner’s 2002 Form 1040, U.S. Individual Income

Tax Return.   Petitioner took his tax attorney’s advice and

reported on his 2002 return $12,500 of the $175,000 in damages he

received.

     In the notice of deficiency, respondent determined that the

entire amount of the settlement was includable in petitioner’s

gross income.   Additionally, respondent determined an accuracy-

related penalty of $9,956 related to petitioner’s failure to

report $162,500 of the settlement proceeds.
                                 - 7 -

                                OPINION

I.   Deficiency

      A.   Burden of Proof

      The Commissioner’s determinations generally are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933); Durando v. United States, 70 F.3d 548,

550 (9th Cir. 1995).   The U.S. Court of Appeals for the Ninth

Circuit, to which an appeal of this case would lie, has held that

in order for the presumption of correctness to attach to the

notice of deficiency in unreported income cases,4 the

Commissioner must establish “some evidentiary foundation” linking

the taxpayer to the income-producing activity, Weimerskirch v.

Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), revg. 67

T.C. 672 (1977), or “demonstrating that the taxpayer received

unreported income”, Edwards v. Commissioner, 680 F.2d 1268, 1270

(9th Cir. 1982); see also Rapp v. Commissioner, 774 F.2d 932, 935

(9th Cir. 1985).    Once there is evidence of actual receipt of

funds by the taxpayer, the taxpayer has the burden of proving

that all or part of those funds are not taxable.    Tokarski v.


      4
        Although Weimerskirch v. Commissioner, 596 F.2d 358 (9th
Cir. 1979), revg. 67 T.C. 672 (1977), was an unreported income
case regarding illegal source income, the U.S. Court of Appeals
for the Ninth Circuit applies the Weimerskirch rule in all cases
involving the receipt of unreported income. See Edwards v.
Commissioner, 680 F.2d 1268, 1270-1271 (9th Cir. 1982); Petzoldt
v. Commissioner, 92 T.C. 661, 689 (1989).
                                - 8 -

Commissioner, 87 T.C. 74 (1986).       Accordingly, petitioner bears

the burden of proof.5   See Rule 142(a).

     B.   Section 104

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

gross income includes all income from whatever source derived

unless otherwise excluded by the Internal Revenue Code.      See

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

Exclusions from gross income are construed narrowly.

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

     As relevant here, section 104 provides:

     SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.

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

                  *     *   *      *      *    *    *

                (2) the amount of any damages (other than
           punitive damages) received (whether by suit or
           agreement and whether as lump sums or as periodic
           payments) on account of personal physical injuries
           or physical sickness;

                  *     *   *      *      *    *    *




     5
        For the first time, in the opening brief petitioner
raises the issue of respondent’s bearing the burden of proof
pursuant to sec. 7491(a), as amended. Generally, we will not
consider an issue that is raised for the first time on brief.
See Foil v. Commissioner, 92 T.C. 376, 418 (1989), affd. 920 F.2d
1196 (5th Cir. 1990); Markwardt v. Commissioner, 64 T.C. 989, 997
(1975).
                                 - 9 -

     * * * For purposes of paragraph (2), emotional distress
     shall not be treated as a physical injury or physical
     sickness. * * *[6]

     “Damages received” mean amounts received “through

prosecution of a legal suit or action based upon tort or tort

type rights, or through a settlement agreement entered into in

lieu of such prosecution.”   Sec. 1.104-1(c), Income Tax Regs.    In

evaluating whether amounts received pursuant to a settlement

agreement are excludable from income pursuant to section

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

agreement to determine the origin and allocation of the

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

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

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

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

     Petitioner settled his claims against the county.    The

parties entered into a settlement agreement via a consent decree

entered by the District Court.    In that consent decree, the

District Court granted petitioner declaratory, injunctive, and

monetary relief.   Petitioner received $175,000 of the $350,000

awarded to the Gibsons pursuant to the consent decree.    The




     6
        Section 104 was amended by the Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1605, 110 Stat.
1838 to provide, effective for amounts received after August 20,
1996, that the personal injury or sickness for which the damages
are received must be physical.
                              - 10 -

District Court did not allocate the proceeds among petitioner’s

claims.

     If a settlement agreement lacks express language stating

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

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

circumstances of the case, including the complaint filed and

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

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

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

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

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

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

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

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

(1943).   Accordingly, the Court must determine the intent of the

payor upon the basis of the facts and circumstances including

petitioner’s complaint in the class action lawsuit.

     Petitioner argues that the first amended complaint includes

a cause of action and remedy for bodily injury and physical

distress.   Petitioner testified that he was verbally and

physically harassed by other residents of Sun City.   According to

petitioner, this harassment and the stress of the lawsuit caused

him to suffer numerous headaches, stomach aches, and breathing
                              - 11 -

problems.   Petitioner testified that he visited a doctor for both

stomach aches and breathing problems.

     Petitioner failed to show how the county or any of the

individuals involved in the class action lawsuit caused his

alleged personal physical injury or physical sickness.

Additionally, petitioner failed to produce any documentary

evidence from his alleged doctor visits.   If a party fails to

introduce evidence within that party’s possession, we may presume

in some circumstances that, if produced, the evidence would be

unfavorable to that party.   Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).   This is true where the party that does not produce

the evidence has the burden of proof or the other party has

established a prima facie case.   Id.   Furthermore, we have

previously held that stomach problems and headaches such as those

suffered by petitioner are symptoms of emotional distress.     See

Hawkins v. Commissioner, T.C. Memo. 2005-149 (explaining that

emotional distress includes symptoms such as headaches and

stomach disorders).   Petitioner produced no receipts,

prescriptions, or other evidence to corroborate his testimony of

his alleged breathing problems.   We are not required to, and do

not, accept petitioner’s self-serving testimony regarding his

alleged personal physical injuries or physical sickness without

corroborating evidence.   See Geiger v. Commissioner, 440 F.2d
                                - 12 -

688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-

159; Lerch v. Commissioner, T.C. Memo. 1987-295, affd. 877 F.2d

624 (7th Cir. 1989).

     Petitioner argues that because the consent decree entered in

the class action lawsuit provided payments for physical injuries

and physical sickness, some share of petitioner’s settlement

proceeds consist of damages received on account of personal

physical injury or physical sickness.    Petitioner argues that

because he was a named member of the certified plaintiff class,

his claims are typical of the claims of the plaintiff class.

Petitioner argues that since unnamed plaintiffs must satisfy one

of the six factors set forth in the consent decree (discussed

supra) to qualify for compensation, petitioner must also satisfy

at least one of the six factors.    Petitioner claims that the only

factor he satisfies is “whether claimant provided evidence of any

other compensable loss.”    Petitioner contends that this

demonstrates that he sustained physical injury and physical

sickness.

     We reject this argument.    The six factors referred to by

petitioner are relevant to determining the amount of compensation

due to unnamed claimants.    Assuming arguendo that we accept

petitioner’s self-serving and uncorroborated testimony, it

appears that petitioner qualified for at least three of the six

factors cited, none of which consists of personal physical
                                 - 13 -

injuries or physical sickness.7      Additionally, factor six, for

which petitioner claims he qualifies, refers to “any other

compensable loss” and does not necessarily include personal

physical injury and physical sickness.

      Apart from petitioner’s self-serving and uncorroborated

testimony, the record does not establish that petitioner received

a portion of his $175,000 total settlement proceeds on account of

personal physical injury or physical sickness.      Accordingly, we

sustain respondent’s determination that the settlement proceeds

petitioner received in 2002 are includable in his gross income.

See Geiger v. Commissioner, supra; Lerch v. Commissioner, supra.

II.   Accuracy-Related Penalty

      A.   Section 6662(a) Penalty

      Respondent determined an accuracy-related penalty under

section 6662(a) of $9,956.    Respondent determined that the entire

underpayment of tax for 2002 was attributable to negligence or

disregard of rules or regulations, and/or a substantial

understatement of income tax.

      Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent of the portion of an underpayment of tax


      7
        Petitioner qualified for factor 1 because he received a
citation. He qualified for factor 2 because the CCE authorities
told the Gibsons they would have to move. Also, the citation
threatened fines and imprisonment. Additionally, petitioner was
served with a notice to appear in court to face possible criminal
charges. He qualified for factor 4 because of the emotional
distress he suffered.
                                 - 14 -

(1) due to negligence or disregard of rules or regulations, or

(2) attributable to any substantial understatement of income tax.

Sec. 6662(b).   The term “understatement” means the excess of the

amount of tax required to be shown on a return over the amount of

tax imposed which is shown on the return, reduced by any rebate

(within the meaning of section 6211(b)(2)).     Sec. 6662(d)(2)(A).

Generally, an understatement is a “substantial understatement”

when the understatement exceeds the greater of $5,000 or 10

percent of the amount of tax required to be shown on the return.

Sec. 6662(d)(1)(A).   The term “negligence” in section 6662(b)(1)

includes any failure to make a reasonable attempt to comply with

the Internal Revenue Code and any failure to keep adequate books

and records or to substantiate items properly.       Sec. 6662(c);

sec. 1.6662-3(b)(1), Income Tax Regs.     Negligence has also been

defined as the failure to exercise due care or the failure to do

what a reasonable person would do under the circumstances.       See

Allen v. Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 348,

353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947

(1985).   The term “disregard” includes any careless, reckless, or

intentional disregard.   Sec. 6662(c).

     B.   Burden of Production

     The Commissioner has the burden of production with respect

to the accuracy-related penalty.     Sec. 7491(c).    To meet this

burden, the Commissioner must produce sufficient evidence
                               - 15 -

indicating that it is appropriate to impose the penalty.      See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).    Once the

Commissioner meets this burden of production, the taxpayer must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect.    Rule 142(a); see Higbee v.

Commissioner, supra.    The taxpayer may meet this burden by

proving that he or she acted with reasonable cause and in good

faith.    See sec. 6664(c)(1); see also Higbee v. Commissioner,

supra; sec. 1.6664-4(b)(1), Income Tax Regs.

     C.    Analysis

     Respondent met his burden of production pursuant to section

7491(c).    Petitioner’s 2002 income tax return contains an

understatement of income tax greater than $5,000.    See sec.

6662(d)(1)(A)(ii).    Accordingly, petitioner bears the burden of

proving that the accuracy-related penalty should not be imposed

with respect to any portion of the underpayment for which he

acted with reasonable cause and in good faith.    See sec.

6664(c)(1); Higbee v. Commissioner, supra at 446.    Relevant

factors include the taxpayer’s efforts to assess his proper tax

liability, including the taxpayer’s reasonable and good faith

reliance on the advice of a professional.    Sec. 1.6664-4(b)(1),

Income Tax Regs.

     Petitioner has no relevant tax education, sophistication, or

business experience.   Petitioner engaged an experienced tax
                              - 16 -

attorney to determine the proper tax treatment of petitioner’s

settlement award.   After discussing the relevant facts and

circumstances of the class action lawsuit with the class action

attorneys, the tax attorney advised petitioner to report $12,500

of the $175,000 settlement as taxable income.   On the basis of

that advice, petitioner reported $12,500 on his 2002 tax return.

Accordingly, petitioner is not liable for the accuracy-related

penalty.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and, to the extent not

mentioned above, we conclude they are irrelevant or without

merit.

     To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
