                            T.C. Summary Opinion 2018-33



                            UNITED STATES TAX COURT



           DONALD L. ZINGER AND NICOLE A. ZINGER, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13096-16S.                            Filed July 2, 2018.



      Donald L. Zinger and Nicole A. Zinger, pro sese.

      Alissa L. VanderKooi and Robert D. Heitmeyer, for respondent.



                                 SUMMARY OPINION


      LEYDEN, 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


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

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

for any other case.

      In a notice of deficiency dated March 7, 2016, respondent determined a

deficiency in Mr. and Mrs. Zinger’s 2013 Federal income tax of $8,531 and a

section 6662(a) accuracy-related penalty of $1,706. After concessions by the

parties,2 the only issue for decision is whether the settlement payment of $20,000

that Mrs. Zinger received in 2013 is excludable from Mr. and Mrs. Zinger’s gross

income under section 104(a)(2). The Court holds that the settlement payment is

not excludable.




      1
        (...continued)
Revenue Code, as amended, in effect at all relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
      2
        The deficiency arises from unreported gross retirement income of $2,859,
unreported taxable retirement income of $1,544, a 10% additional tax under sec.
72(t) of $440 on the unreported gross and taxable retirement income, and
unreported other income of $20,000. Mr. and Mrs. Zinger do not dispute that they
received the gross retirement income of $2,859 and taxable retirement income of
$1,544 and that they are liable for the 10% additional tax under sec. 72(t) of $440.
They also do not dispute that Mrs. Zinger received a settlement payment (i.e., the
other income) of $20,000 but dispute whether it must be included in gross income
for 2013. Respondent concedes that Mr. and Mrs. Zinger are not liable for the sec.
6662(a) accuracy-related penalty for 2013.
                                         -3-

                                    Background

      At the time Mr. and Mrs. Zinger filed their petition they resided in

Michigan. They timely filed their 2013 joint Federal income tax return and, as

relevant in this case, did not report the settlement payment of $20,000.

I.    Mrs. Zinger’s Conflict at Work

      Sometime before 2013 Mrs. Zinger began working for the Department of

the Army (Army), and she continued to work for the Army until her resignation on

January 17, 2013. In late 2011 Mrs. Zinger was in a car accident while driving

home from work. The car accident resulted in a back injury for which she was

required to receive physical therapy frequently for two to three months after the

accident. Her supervisor at that time leniently allowed her to use sick time to

receive the necessary physical therapy. In March 2012 Mrs. Zinger’s supervisor

was reassigned, and Jack Spielman became her supervisor. Shortly thereafter Mrs.

Zinger and Mr. Spielman had conflicts.

      Mr. Spielman was not aware of Mrs. Zinger’s accident or her physical

condition after the accident and questioned her availability at work. Mrs. Zinger

provided Mr. Spielman with information about her accident, and according to Mrs.

Zinger “everything was squared away and set”.
                                        -4-

      In April 2012 Mrs. Zinger took a preapproved two-week family vacation.

During the family vacation her grandmother became very ill. After the family

vacation Mrs. Zinger returned to work. She had another preapproved vacation

with Mr. Zinger scheduled to start May 10, 2012, but her grandmother’s health

worsened. Mrs. Zinger changed her vacation plans to be with her grandmother

and received approval from an acting supervisor, Cynthia Person, to begin her

preapproved leave early on May 8, 2012, so that she could spend the last few days

with her grandmother. While traveling to see her grandmother, she continued to

do some work and took business phone calls. At some point Mr. Spielman

notified her that she was not to take any business phone calls while she was on

leave, and Mrs. Zinger stopped and arranged for another employee to conduct

business while she was on leave.

      After her grandmother had passed away, Mrs. Zinger returned to the office

and logged her leave as bereavement leave. Mr. Spielman notified her that he was

changing her bereavement leave to absent without leave (AWOL) because a

grandparent’s death did not qualify for bereavement leave. He requested that Mrs.

Zinger provide documentation from her grandmother’s attending physician

verifying that Mrs. Zinger’s presence was required for the leave to qualify as

bereavement leave. Mrs. Zinger obtained the requested documentation and her
                                        -5-

AWOL status was changed to bereavement leave. Mrs. Zinger felt that Mr.

Spielman belittled and personally attacked her.

      While Mrs. Zinger was on leave, Mr. Spielman relocated her desk to an area

that separated her from her coworkers. When she returned to work, she asked her

coworkers if another desk closer to them was available and moved her belongings

to that available desk. Mrs. Zinger believed that being separated from her

coworkers was not conducive to the work she needed to perform. Mr. Spielman

ordered her to move her belongings back to her relocated desk. Mrs. Zinger

continued to feel personally attacked and belittled by Mr. Spielman. He told her

she did not know what she was doing and that she was not conducting her work

properly. He questioned what Mrs. Zinger did, where she was, and why she was

not working at night. Mrs. Zinger testified that after this her heart began racing,

she experienced shortness of breath, and she felt as though she might be having a

heart attack.

      On May 18, 2012, Mrs. Zinger sought medical attention for her symptoms.

Her doctor determined that her white blood cell count was severely elevated. Her

doctor recommended that she be placed on medical leave status starting May 18,

2012, and that certain tests be performed to determine her condition. Her doctor
                                         -6-

performed the tests, prescribed her various medications, and cleared her to return

to work on May 29, 2012.

      On May 29, 2012, she received a memorandum of reprimand. In that

memorandum Mr. Spielman reprimanded her for “discourteous behavior toward a

supervisor”. Mr. Spielman alleged that a May 8, 2012, email from Mrs. Zinger

had a “very discourteous tone”. The memorandum of reprimand notified Mrs.

Zinger of her right to file a grievance and also to file a complaint of discrimination

with the TACOM-LCMC Equal Employment Opportunity Office (EEO) if she

believed the action discriminated against her on the basis of race, color, religion,

sex, national origin, age, physical or mental handicap, and/or reprisal.

      On June 1, 2012, Mrs. Zinger was experiencing car trouble and notified Ms.

Person by email that she would be late to work that morning. On June 4, 2012,

Ms. Person requested that Mrs. Zinger provide documentation to prove that she

had car trouble and notified her that her leave would be documented as AWOL

until the requested documentation was provided.

      On that same day, Mrs. Zinger filed a formal written grievance to dispute

Mr. Spielman’s facts in the memorandum of reprimand. In her grievance she

stated: “The untimeliness of this reprimand only came with reprisal for the

previous actions and claims made by myself against Mr. Spielman to include
                                        -7-

creating a hostile work environment and creating a very intimidating situation

which led to serious health conditions on my part requiring me to be under

doctor’s care for a week.” She further stated: “I feel I have received reprisal and

have been intim[id]ated enough that it is affecting my health and my health

continues to be of concern which is demonstrated by the medications I have been

placed on.” In addition to requesting that the memorandum of reprimand be

removed from her personnel file and destroyed, Mrs. Zinger also requested that the

Army reassign her to another supervisor or to stop Mr. Spielman from engaging in

actions that she believed were hostile or intimidating. For example, she requested

      [to] be placed in an environment where Mr. Spielman cannot act in a
      hostile nor intimidating manner towards myself. Since this dispute
      has arisen, I have suffered from medical issues and conditions to
      include chest pains, shortness of breaths, hypertension due to stress,
      high blood pressure, and high white blood cell count. I am still
      undergoing medical tests. Originally I felt the situation between Mr.
      Spielman and myself was causing severe anxiety * * *

      On June 4, 2012, Mrs. Zinger’s doctor recommended that she be placed on

medical leave from June 4 through 18, 2012, and that she return to work on June

19, 2012, at a reduced work schedule until August 20, 2012. The noted medical

condition was anxiety, panic attacks, and hypothyroidism. Her treatment included

medication, rest, and a stress free environment. On June 18, 2012, after a follow
                                         -8-

up doctor’s appointment, Mrs. Zinger notified Ms. Person that her doctor

recommended that she not return to work until June 25, 2012.

      When Mrs. Zinger returned to work on June 25, 2012, at the reduced work

schedule, she learned that she had lost her computer access and security clearance.

As a result, she had to sit at a desk with little work to perform.

II.   EEO Complaint

      At some point thereafter, the EEO began an investigation. The record is not

clear whether Mrs. Zinger filed both a formal written grievance and a complaint of

discrimination with the EEO or whether her formal written grievance was

forwarded to the EEO and served as the basis for that complaint. In a statement of

claims the EEO listed the following as Mrs. Zinger’s stated claims to be

investigated:

            Whether * * * [Mrs. Zinger] was discriminated against based
      on sex (female) and subjected [to a] hostile work environment when:

             a.     On May 8-10, 2012, she was placed on AWOL for not
                    producing a physician’s statement letter excusing her
                    absences;
             b.     On May 16, 2012, she was denied a developmental
                    assignment in the Program Executive Office (PEO),
                    Ground Combat Systems (GCS);
             c.     On May 29, 2012, she received a Letter of Reprimand for
                    discourteous behavior towards Mr. Spielman;
                                       -9-

             d.    [On June 4, 2012,] [s]he was required to provide proof of
                   repairs and placed in AWOL status for 1.5 hours when
                   her vehicle broke down * * *
             e.    On June 6, 2012, she was ordered to return a government
                   issued cell phone and laptop computer to Mr. Spielman
                   when she was on five days of sick leave; and
             f.    On June 25, 2012, she became aware that she had been
                   stripped of her computer access and security clearance.

The EEO statement of claims does not refer to any personal physical injuries or

physical sickness. Mrs. Zinger was offered the opportunity to use the EEO

Alternative Dispute Resolution Program and agreed to participate in mediation.

Mr. Zinger, who accompanied Mrs. Zinger to the EEO mediation, testified that

Mrs. Zinger explained during the mediation how she felt. However, mediation

was not successful.

       From September 2012 through January 2013, Mrs. Zinger was placed on

administrative leave while the EEO conducted its investigation. A preconference

was scheduled for December 3, 2012, followed by a formal fact-finding

conference scheduled from December 3 to 4, 2012. Mr. Zinger accompanied Mrs.

Zinger to these conferences as her representative and to provide moral support.

III.   Settlement Agreement

       On January 17, 2013, Mrs. Zinger and the Army executed a negotiated

settlement agreement (settlement agreement) to settle the EEO complaint of
                                        - 10 -

discrimination. Pursuant to that agreement the Army: (1) did not admit it had

violated the Civil Rights Act of 1964 or any other Federal or State statute, law, or

regulation; (2) agreed to pay Mrs. Zinger $20,000; (3) agreed to change an AWOL

status recorded on Mrs. Zinger’s records for November 14 and 15, 2012, to regular

duty time; and (4) agreed to make arrangements for Mrs. Zinger to retrieve her

belongings from her work station.

      Pursuant to the settlement agreement, Mrs. Zinger agreed: (1) to

immediately tender her resignation from Federal service effective January 17,

2013, including agreeing to sign a resignation letter and any official paperwork or

forms required to complete the resignation; (2) that the settlement agreement

constituted “a full and complete settlement of any and all issues and claims arising

from” the EEO complaint and waived her right to pursue any administrative or

judicial action concerning the matters raised in the EEO complaint; (3) to

withdraw any other complaints, appeals, or grievances she may have filed and to

waive her right to pursue any administrative or judicial action regarding any other

matters that had been filed; and (4) not to file or pursue any complaints, appeals,

or grievances. The settlement agreement did not refer to Mrs. Zinger’s formal

written grievance.
                                       - 11 -

      The agreement expressly stated: “The document contains the entire

agreement of the parties. No other promises or agreements have been made. This

Agreement may not be modified or amended except in writing, signed by all the

* * * signatories.” The settlement agreement does not refer to any personal

physical injuries or physical sickness suffered by Mrs. Zinger.

      Mrs. Zinger received a check dated March 28, 2013, for $20,000. The

$20,000 settlement payment was reported to Mrs. Zinger and to the IRS on Form

1099-MISC, Miscellaneous Income.3

                                    Discussion

      The Commissioner’s determination in a notice of deficiency is presumed

correct, and a taxpayer bears the burden of proving that the determination is

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

Under section 7491(a)(1), the burden of proof may shift to the Commissioner if

the taxpayer produces credible evidence with respect to any relevant factual issue

and meets other requirements. Mr. and Mrs. Zinger have neither argued that




      3
       A Form 1099-MISC was initially issued reporting a payment of $40,000 as
nonemployee compensation. A corrected Form 1099-MISC was subsequently
issued accurately reporting the settlement payment as $20,000 and as other
income. The parties agree that the settlement payment at issue is $20,000 of other
income.
                                       - 12 -

section 7491(a)(1) applies nor established that its requirements are met. The

burden of proof remains with Mr. and Mrs. Zinger.

      Generally, gross income includes all income from whatever source derived.

See sec. 61(a); sec. 1.61-1(a), Income Tax Regs. While section 61(a) broadly

applies to any accession to wealth, statutory exclusions from gross income are to

be narrowly construed. See Commissioner v. Schleier, 515 U.S. 323, 327-328

(1995); United States v. Burke, 504 U.S. 229, 233 (1992); Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955). Litigation settlement

proceeds constitute gross income unless the taxpayer proves that the proceeds fall

within a specific statutory exclusion. Commissioner v. Schleier, 515 U.S. at 328-

337; see Save v. Commissioner, T.C. Memo. 2009-209, 2009 Tax Ct. Memo

LEXIS 211, at *3. Mr. and Mrs. Zinger must bring themselves within the clear

scope of a statutory exclusion to succeed in proving they are entitled to exclude

the settlement payment from gross income for 2013. See Commissioner v.

Schleier, 515 U.S. at 327-328; Burke, 504 U.S. at 233.

      Mr. and Mrs. Zinger assert that the settlement payment is excludable from

gross income under section 104(a)(2). That section provides that gross income

does not include “the amount of any damages (other than punitive damages)

received (whether by suit or agreement * * *) on account of personal physical
                                        - 13 -

injuries or physical sickness”. Sec. 104(a)(2). Congress intended this exclusion to

cover damages that flow from a physical injury or physical sickness. See H.R.

Conf. Rept. No. 104-737, at 301 (1996), 1996-3 C.B. 741, 1041. For purposes of

section 104(a)(2), emotional distress is not treated as a physical injury or physical

sickness, except for damages not in excess of the cost of medical care attributable

to emotional distress. Sec. 104(a) (flush language).

      When damages are received under a settlement agreement, the nature of the

claim that was the actual basis for the settlement determines whether the damages

are excludable under section 104(a)(2). Burke, 504 U.S. at 237. The nature of the

claim is typically determined by reference to the terms of the agreement. See

Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), aff’g T.C. Memo.

1964-33; Robinson v. Commissioner, 102 T.C. 116, 126 (1994), aff’d in part,

rev’d in part, and remanded on another issue, 70 F.3d 34 (5th Cir. 1995). The

“key question” is: “In lieu of what were the damages awarded?” Robinson v.

Commissioner, 102 T.C. at 126 (quoting Raytheon Prod. Corp. v. Commissioner,

144 F.2d 110, 113 (1st Cir. 1944), aff’g 1 T.C. 952 (1943)).

      To determine whether the $20,000 settlement payment Mrs. Zinger received

pursuant to the settlement agreement is excludable from gross income under

section 104(a)(2), the Court looks to the express terms of that agreement. The
                                       - 14 -

settlement agreement between Mrs. Zinger and the Army states that its purpose

was to settle the EEO complaint. Although the record does not contain a copy of

the EEO complaint, the claims in the EEO statement of claims presumably derive

from that complaint. The EEO statement of claims neither references any personal

physical injuries or physical sickness of Mrs. Zinger nor allocates the $20,000

settlement payment as compensation to Mrs. Zinger for personal physical injuries

or physical sickness. Rather, the EEO statement of claims explicitly states that the

EEO was investigating whether Mrs. Zinger had been subjected to a hostile work

environment or was discriminated against on the basis of sex. Therefore, the

settlement agreement indicates that the Army intended to settle the hostile work

environment and discrimination claims, not to compensate Mrs. Zinger for

personal physical injuries or physical sickness.

      Mrs. Zinger testified that during the conversations with the EEO attorneys,

it was mentioned that the settlement payment was to compensate her for the

personal physical sickness she had suffered but that the Army was unwilling to

admit fault as to any claims in the settlement agreement. Undoubtedly, Mrs.

Zinger’s formal written grievance references her personal physical sickness.

However, neither the settlement agreement nor the EEO statement of claims refers
                                        - 15 -

to the formal written grievance or to any personal physical sickness, let alone an

intent to compensate Mrs. Zinger for personal physical sickness.

        Although the Court is sympathetic to Mrs. Zinger’s situation, she and Mr.

Zinger have not satisfied their burden of introducing objective and credible

evidence that any part of the $20,000 settlement payment was made “in lieu” of

damages for personal physical injuries or physical sickness. See Simpson v.

Commissioner, 141 T.C. 331, 339-340 (2013) (quoting Fono v. Commissioner, 79

T.C. 680, 692 (1982), aff’d without published opinion, 749 F.2d 37 (9th Cir

1984)), aff’d 668 F. App’x 241 (9th Cir. 2016); Robinson v. Commissioner, 102

T.C. at 126.

        The Court concludes that the settlement payment made to Mrs. Zinger

pursuant to the settlement agreement was for the resolution and withdrawal of her

discrimination and hostile work environment claims and not on account of

personal physical injuries or physical sickness. Therefore, the $20,000 settlement

payment Mrs. Zinger received pursuant to the settlement agreement is not

excludable under section 104(a)(2) from Mr. and Mrs. Zinger’s gross income for

2013.
                                      - 16 -

      The Court has considered the parties’ arguments and, to the extent not

discussed herein, the Court concludes the arguments to be irrelevant, moot, or

without merit.

      To reflect the foregoing,


                                               Decision will be entered for

                                      respondent as to the deficiency and for

                                      petitioner as to the accuracy-related penalty

                                      under section 6662(a).
