Robinson v. Comm'r of Internal Revenue
| Decision Date | 02 February 1994 |
| Docket Number | No. 24665–91.,24665–91. |
| Citation | 102 T.C. 116,102 T.C. No. 7 |
| Parties | Edward E. ROBINSON and Sandra Robinson, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John A. Townsend, for petitioners.1
Ansley Acree and Gerald Brantley, for respondent.
Ps filed a lawsuit against Bank (B) alleging that B failed improperly to release its lien on Ps' property. Following a jury verdict for Ps totaling approximately $60 million, which included $6 million for lost profits, $1.5 million for mental anguish, and $50 million for punitive damages, Ps and B agreed to settle the lawsuit for $10,691,972.43. In connection with their settlement, Ps prepared unilaterally a final judgment allocating 95 percent of the settlement proceeds to tortlike personal injuries; the final judgment was entered by the trial court in accordance with the settlement.
1. Held: The Court is not bound by the allocation of damages in the final judgment, and must determine the portion of the settlement proceeds that was attributable to Ps' tortlike personal injuries. Held, further, the portion of the settlement proceeds attributable to Ps' tortlike personal injuries (and excludable from Ps' gross income under sec. 104(a)(2), I.R.C.) equals 37.331 percent. LARO, Judge:
This case is before the Court pursuant to a petition filed by Edward E. Robinson and Sandra Robinson (petitioners) for a redetermination of respondent's determination reflected in her notice of deficiency issued to them on July 25, 1991. Respondent's notice of deficiency reflected her determination of deficiencies in petitioners' 1987 and 1988 Federal income taxes equal to $1,579,549 and $90,800, respectively.
A trial was held on this matter on February 23, 1993, in Houston, Texas. At the conclusion of the trial, the Court allowed respondent to amend her answer to conform to the evidence presented at the trial. Respondent alleged in her amendment that petitioners failed to report on their 1987 Federal income tax return $691,972.43 in additional settlement proceeds that petitioners “received” through a release of a judgment that they owed to the payor of the settlement.
The primary issue for decision is what portion of certain settlement proceeds that petitioners received in 1987 is excludable from their gross income under section 104(a)(2).2 Petitioners contend that 95 percent of these proceeds is excludable from their gross income because the final judgment reflecting the settlement (Final Judgment) attributed the recovery of 95 percent of the proceeds to tortlike personal injuries. Respondent determined that 5 percent of these settlement proceeds was excludable from gross income; in her mind, the Final Judgment was insignificant because: (1) It did not reflect accurately the underlying settlement, and (2) the trial court did not independently review the allocation contained therein, and merely “rubber stamped” petitioners' out-of-court agreement. We agree with respondent that the allocation in the Final Judgment does not control this case, and sustain her determination that petitioners reported erroneously that only 5 percent of the settlement proceeds was includable in their 1987 gross income. We disagree with respondent, however, that 95 percent of the proceeds is includable in petitioners' gross income; we find that petitioners must include 62.669 percent of the settlement proceeds in their gross income.
As a secondary issue, we must decide whether petitioners had additional income of $691,972.43 in 1987, resulting from the release of the judgment that they owed the payor of the settlement. With regard to this issue, we conclude that petitioners had additional income in 1987 of $433,652.20; i.e., 62.669 percent of $691,972.43. We also conclude that petitioners may deduct, for 1987, related expenses of $70,949.67.3
Some of the facts have been stipulated and are so found. The stipulations and exhibits attached thereto are incorporated herein by this reference. Petitioners were husband and wife during the taxable years in issue; they resided in Texas at the time they filed their petition. Petitioners filed 1987 and 1988 Forms 1040, U.S. Individual Income Tax Return, using the status of “Married filing joint return”.
In 1981, petitioners decided to open a furniture store in Hidalgo County, Texas, with a building that would be the largest furniture showroom in South Texas. Petitioners contracted with a builder to construct the building and obtained financing from Texas Commerce Bank–McAllen (Bank). Petitioners initially borrowed $1,514,570 from Bank; this initial loan was reflected in a deed of trust dated March 1, 1982. Petitioners subsequently borrowed $1,580,753.76 from Bank to extend their initial loan; this subsequent loan was reflected in a deed of trust dated December 14, 1982. (Hereinafter, the initial and subsequent loans are collectively referred to as the Construction Loans.) The Construction Loans were secured solely by the building under construction and the underlying property. (Hereinafter, the building under construction and the underlying property are collectively referred to as the Business Property.)
In or about September 1982, after petitioners' furniture business had opened, Bank entered into a contract with petitioners under which Bank granted petitioners $165,000 in letters of credit to purchase inventory for their furniture business. Petitioners collateralized the letters of credit with a deed of trust on Bonanza, petitioners' real property unrelated to the Business Property; Bank placed a lien on Bonanza. Bonanza was valued at $425,000 at the time of collateralization, was owned by petitioners as a “reserve” to assist them in troubled economic times, and was unencumbered immediately before this collateralization.
Petitioners paid off the $165,000 indebtedness in or before February 1983, and, in so doing, satisfied the terms of the letters of credit. As a result thereof, Bank should have released its lien on Bonanza. Bank failed to do so.
Petitioners' furniture business experienced difficulties.4 Faced with serious cash flow problems, petitioners attempted to neutralize these problems by either selling Bonanza or borrowing against it. Petitioners learned at this time that Bank had not released its lien on Bonanza, and asked Bank to do so. Bank did not release its lien. Petitioners subsequently repeated their request on numerous occasions. Bank refused to honor any of these subsequent requests.5
Bank's refusal to release its lien on Bonanza devastated petitioners; their “reserve” was inaccessible to relieve the financial troubles of their business, and their business credibility with their suppliers was destroyed. Petitioners' furniture business failed, they were forced to sell inventory and other property at large losses, and they were driven into bankruptcy. In addition, Sandra Robinson developed severe psychological problems and required hospitalization.
On July 6, 1984, petitioners filed a complaint in the 206th District Court of Hidalgo County, Texas, against Bank and its parent corporation, Texas Commerce Bancshares, Inc. (Commerce). (Hereinafter, unless otherwise noted, Bank and Commerce are collectively referred to as Defendants.) The nub of petitioners' complaint against Defendants was that Defendants failed improperly to release their lien on Bonanza, and, as a result thereof, prevented petitioners from obtaining funds necessary to maintain their furniture business. Defendants' failure to release the lien, petitioners claimed, ultimately forced them to close their furniture business and damaged them in their business and personal affairs.
On June 3, 1986, Bank foreclosed on the Business Property. At the time of foreclosure, the amount due on the Construction Loans was $2,053,759.08. A nonjudicial foreclosure sale of the Business Property was held on the same day as the foreclosure; the Business Property was sold at the sale for $1,475,000, and the sales price was applied against the amount due on the Construction Loans leaving a deficiency of $578,759.08.
On April 13, 1987, a jury trial commenced in petitioners' lawsuit against Defendants; Judge Joe B. Evins presided. At this time, petitioners' most recent pleadings were their: (1) Second amended original petition and (2) first supplemental petition and answer. Petitioners' second amended original petition alleged, in part, that Defendants' failure to release the lien on Bonanza was willful, an act of malice and in reckless and conscious disregard of petitioners' rights, unconscionable, based on false representations, tortious, and a cloud on title.6 Petitioners prayed for the following damages: (1) Lost profits of $20 million, (2) $250,000 for losses that petitioners incurred on the forced sales of properties other than Bonanza, (3) $200,000 for amounts incurred by petitioners in their futile attempt to save their business, (4) $5 million for severe mental anguish suffered by petitioners before trial, (5) $5 million for future severe mental anguish of petitioners, and future damage to petitioners' reputations, (6) exemplary (punitive) damages of five times the amount of actual or compensatory damages awarded in the case, (7) attorney fees as proven at trial, (8) prejudgment interest as authorized by the Texas Supreme Court, (9) postjudgment interest as applicable, (10) their court costs, (11) all damages allowed by the Texas Deceptive Trade Practices Act, and (12) that the lien on Bonanza be declared null and void, and of no force and effect, thereby removing the cloud on the title to Bonanza.7
After both sides rested, approximately 1 month after the trial began, the trial court granted a motion for directed verdict in favor of Commerce; it was dismissed from the action. Shortly thereafter, on May 11, 1987, petitioners' case against Bank was submitted to the jury.
On May 12, 1987, the jury returned its verdict.8 The jury found that: (1) Petition...
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