                        T.C. Memo. 2011-263



                      UNITED STATES TAX COURT



         MIGUEL A. AND ANTONIA GUTIERREZ, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21671-08.               Filed November 7, 2011.



     Miguel A. and Antonia Gutierrez, pro sese.

     John Chinnapongse and Matthew D. Carlson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined a deficiency in

petitioners’ 2005 Federal income tax of $3,249 and an addition to

tax under section 6651(a)(1)1 of $53.


     1
      Unless otherwise noted, all section references are to the
Internal Revenue Code of 1986, as in effect for the taxable year
in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               -2-

     After concessions,2 the remaining issues for decision are:

(1) Whether petitioners are entitled to exclude from gross income

$35,000 that petitioner wife received pursuant to a settlement of

several claims against her former employer, and (2) whether

petitioners are liable for an addition to tax under section

6651(a)(1).

                        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 the petition

was filed, petitioner husband resided in California and

petitioner wife resided in Mexico.

Petitioner Wife’s Lawsuit

     During 2000, 2001, and 2002 petitioner wife worked as a

vineyard worker for R.H. Phillips, Inc. (Phillips), performing a

variety of tasks including pruning and tying vines, training new

plants, harvesting, and other agricultural tasks.   In 2004

petitioner wife and three other female vineyard workers

(plaintiffs) sued Phillips, among others, on several grounds in




     2
      Petitioners concede that they failed to report $53 in
taxable wage income and $1,113 in taxable unemployment
compensation for 2005.
                                 -3-

the Superior Court for the State of California (lawsuit).    Among

other counsel, the plaintiffs were represented in the lawsuit by

the law firm of Talamantes, Villegas, Carrera LLP.

     The complaint in the lawsuit listed the following causes of

action:    (1) Unlawful employment discrimination based on sex, (2)

unlawful failure to prevent harassment, (3) unlawful failure to

prevent discrimination, (4) retaliation for opposing employment

discrimination, (5) aiding, abetting, and inciting

discrimination, (6) misrepresentation preventing former employee

from obtaining employment, (7) wrongful termination/failure to

rehire in violation of public policy, (8) failure to pay minimum

wages, (9) liquidated damages for failure to pay minimum wages,

(10) failure to provide rest periods, (11) failure to provide

meal periods, (12) failure to provide employees with necessary

and required tools and equipment, and (13) restitution and

injunctive relief on the grounds of, inter alia, loss of money,

loss of property, and personal injuries attributable to Phillips’

failure to provide potable water at the worksite or adequate

restroom breaks.   The complaint does not allege that emotional

distress resulted from the alleged physical injuries but does

allege that emotional distress such as anxiety and stress

resulted from other grounds in the complaint (e.g., emotional

distress attributable to unlawful employment discrimination based

on sex).
                                 -4-

Settlement Agreement

     On or around August 12, 2005, petitioner wife and the other

plaintiffs settled all of the grounds of the lawsuit by entering

into a settlement agreement negotiated by their counsel and

counsel for Phillips.   Pursuant to the settlement agreement,

Phillips paid $180,000 to an attorney-client trust established by

Talamantes, Villegas, Carrera LLP and the plaintiffs agreed to

release Phillips from all claims in the lawsuit and any other

claims the plaintiffs might have against Phillips.    The

settlement agreement stated that the $180,000 was paid “as

compensation to the Plaintiffs for emotional distress damages

only and for attorneys’ fees”.    The plaintiffs were all

monolingual Spanish speakers.    A declaration accompanying the

settlement agreement states that the settlement agreement was

orally translated into Spanish in the presence of the plaintiffs

and that the plaintiffs acknowledged that they understood the

translation of the settlement agreement.

     In 2005 petitioner wife received $35,000 from the settlement

agreement through the attorney-client trust.

Petitioners’ 2005 Return

     Petitioners received an extension of time until October 15,

2006, to file their 2005 Federal income tax return.    Petitioners

filed their 2005 return on November 21, 2006.    Petitioners did

not include in gross income on their 2005 return the $35,000 that
                                 -5-

petitioner wife had received pursuant to the settlement

agreement.

Notice of Deficiency and Petition

     In a timely notice of deficiency, respondent determined that

the $35,000 petitioner wife received pursuant to the settlement

agreement in 2005 was includable in petitioners’ gross income for

that year and that petitioners were liable for an addition to tax

under section 6651(a)(1) for the late filing of the return.     In

their timely petition, petitioners alleged, inter alia, that

during her work for Phillips petitioner wife suffered physical

injuries as a result of exposure to pesticides (namely

respiratory damage, constant headaches, and loss of vision) and

emotional distress (including mental trauma and memory loss)

attributable to such physical injuries.

                               OPINION

Unreported Income

     We must first decide whether petitioners must include in

gross income for 2005 the $35,000 that petitioner wife received

pursuant to the settlement agreement.    Petitioners contend that

the settlement is excludable from gross income under section

104(a)(2), which provides an exclusion from gross income for

damages received on account of personal injuries or physical

sickness.    Respondent contends that petitioners are not entitled

to exclude the settlement from gross income under section
                                -6-

104(a)(2), because the settlement agreement indicates that the

settlement was not paid on account of personal physical injuries

or physical sickness.

     Respondent’s determinations in the notice of deficiency are

presumed to be correct, and petitioners bear the burden of

proving that the determinations are in error.    See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).3

     Section 61(a) provides that gross income means all income

from whatever source derived except as otherwise provided.

Exclusions from gross income must be narrowly construed.

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

Commissioner, 100 T.C. 124, 128 (1993), affd. without published

opinion 25 F.3d 1048 (6th Cir. 1994).   One such exclusion is

found in section 104(a)(2), which provides that gross income does

not include the amount of any 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.

     The requirement that the injuries or sickness be physical

dates from 1996, when Congress amended section 104(a)(2) to add

that limitation.   Effective generally for damages received after

August 20, 1996, in tax years ending after such date, damages for

emotional distress are not excludable from gross income (1)

     3
      Petitioners have not established that the burden of proof
has shifted to respondent with respect to any factual issue in
this case. See sec. 7491(a).
                                -7-

unless the emotional distress is attributable to a personal

physical injury or physical sickness, or (2) except to the extent

the damages do not exceed amounts paid for medical care

attributable to emotional distress.   See sec. 104(a) (flush

language); Small Business Job Protection Act of 1996, Pub. L.

104-188, sec. 1605, 110 Stat. 1755, 1838; see also Lindsey v.

Commissioner, 422 F.3d 684, 687-688 (8th Cir. 2005), affg. T.C.

Memo. 2004-113; Mayberry v. United States, 151 F.3d 855, 858 n.2

(8th Cir. 1998).

     When damages are received pursuant to a settlement

agreement, the nature of the claim underlying the settlement

agreement, not its validity, controls whether a payment is

excludable under section 104(a)(2).   United States v. Burke, 504

U.S. 229, 237 (1992); Bagley v. Commissioner, 121 F.3d 393, 395

(8th Cir. 1997), affg. 105 T.C. 396, 406 (1995).   The

determination of the nature of the claim is a factual inquiry and

is generally made by reference to the settlement agreement in the

light of the surrounding circumstances.   Robinson v.

Commissioner, 70 F.3d 34, 37-38 (5th Cir. 1995), affg. in part

and revg. in part on another issue 102 T.C. 116, 126 (1994);

Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965),

affg. T.C. Memo. 1964-33.   An express allocation in the

settlement agreement is generally binding for tax purposes

provided the agreement was entered into by adversarial parties
                                 -8-

acting at arm’s length and in good faith.     Bagley v.

Commissioner, supra at 396; Robinson v. Commissioner, supra at

37-38; Allum v. Commissioner, T.C. Memo. 2005-177, affd. 231 Fed.

Appx. 550 (9th Cir. 2007).    However, an express allocation will

not be respected if it does not reflect the intent of the

parties.    Bagley v. Commissioner, supra at 396; Delaney v.

Commissioner, 99 F.3d 20, 24 (1st Cir. 1996), affg. T.C. Memo.

1995-378.   The intent of the payor, and not the recipient, is

critical in determining the validity of an express allocation in

a settlement agreement.     Robinson v. Commissioner, supra at 37;

Knuckles v. Commissioner, supra at 613; Agar v. Commissioner, 290

F.2d 283, 284 (2d Cir. 1961), affg. T.C. Memo. 1960-21; Metzger

v. Commissioner, 88 T.C. 834, 847-848 (1987), affd. without

published opinion 845 F.2d 1013 (3d Cir. 1988).

     The petition alleges that petitioner wife was exposed to

pesticides during her work for Phillips and that she suffered

both physical injuries, including respiratory damage and

headaches, and emotional distress, including mental trauma and

memory loss, as a result.    However, there is no allegation of

harm caused by pesticides in the complaint in the lawsuit.

Accordingly, we find that the settlement payment could not have

constituted compensation for any pesticide-related injury,

whether physical or emotional.
                                 -9-

     Petitioner husband testified that his wife suffered physical

injuries attributable to her work for Phillips and did not

understand when she signed the settlement agreement that the

settlement was for emotional distress only (notwithstanding that

the agreement expressly so provided and was translated into

Spanish for her).    Respondent contends that the settlement

payment is not excludable from petitioners’ gross income because

it was not received on account of personal physical injuries or

physical sickness.

     The complaint alleges that petitioner wife suffered personal

injury as a result of Phillips’ failure to provide potable water

at the worksite or adequate restroom breaks.    The complaint does

not allege that the foregoing resulted in any emotional distress.

The settlement agreement expressly allocates the damages paid to

emotional distress and attorney’s fees.    The settlement agreement

on its face, as well as other evidence in the case, establishes

that petitioner wife was represented by counsel when she entered

the settlement agreement.

     We are persuaded by the evidence that the settlement

agreement was entered into by adversarial parties acting at arm’s

length and in good faith.    Petitioner husband’s contention that

his wife did not understand that she was receiving damages only

on account of emotional distress does not, in these

circumstances, persuade us that the settlement agreement fails to
                               -10-

reflect the intent of the parties, given that petitioner wife was

represented by counsel.   The fact that the settlement agreement

does not reference any physical injury (related to potable water,

restroom breaks, or otherwise) persuades us that there was no

intention to compensate for physical injury.4    Instead, the

settlement agreement evidences Phillips’ intent to pay damages

only for emotional distress (and attorney’s fees).    In these

circumstances, we conclude that the allocation in the settlement

agreement controls.

     Finally, there is no evidence that petitioner wife incurred

any expenses in 2005 for medical care attributable to emotional

distress.

     Consequently, there is no basis to exclude any portion of

the $35,000 from gross income under section 104(a)(2).     We

accordingly sustain respondent’s determination that petitioners

had unreported income in that amount for 2005.

Section 6651(a)(1) Addition to Tax

     Respondent determined a section 6651(a)(1) addition to tax

for failure to timely file.   As the parties have stipulated that

petitioners’ 2005 return was filed on November 21, 2006,

     4
      As the complaint did not even allege emotional distress
arising from inadequate access to potable water or restroom
breaks, we are satisfied that no portion of the settlement could
have been compensation for emotional distress attributable to
such claims. We note in this regard that the complaint did
allege emotional distress as a result of other allegations in the
complaint (e.g., unlawful discrimination based on sex).
                               -11-

respondent has satisfied his burden of production with respect to

the addition and petitioners are therefore liable unless they can

establish reasonable cause for the late filing.    See sec.

7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-448 (2001).

Petitioner husband testified that he filed late because he was

preoccupied with petitioner wife’s immigration problems.

“Selective inability” to file a timely tax return--i.e., while

attending to other matters--does not demonstrate reasonable

cause.   Wright v. Commissioner, T.C. Memo. 1998-224, affd.

without published opinion 173 F.3d 848 (2d Cir. 1999); see also

Bear v. Commissioner, 19 F.3d 26 (9th Cir. 1994), affg. without

published opinion T.C. Memo. 1992-690; Dustin v. Commissioner,

467 F.2d 47, 50 (9th Cir. 1972), affg. 53 T.C. 491, 507 (1969);

Tabbi v. Commissioner, T.C. Memo. 1995-463; Kemmerer v.

Commissioner, T.C. Memo. 1993-394; Fambrough v. Commissioner,

T.C. Memo. 1990-104.   Accordingly, we sustain respondent’s

imposition of an addition to tax under section 6651(a)(1).

     To reflect petitioners’ concessions and the foregoing,


                                           Decision will be entered

                                      for respondent.
