105 T.C. 396 (T.C. 1995), 531-93, Bagley v. Commissioner of Internal Revenue
|Citation:||105 T.C. 396, 105 T.C. No. 27|
|Opinion Judge:||SCOTT, Judge:|
|Party Name:||HUGHES A. BAGLEY AND MARILYN B. BAGLEY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Mark Arth, for petitioners. Jack Forsberg, for respondent.|
|Judge Panel:||HAMBLEN, CHABOT, COHEN, SWIFT, JACOBS, GERBER, WRIGHT, PARR, WELLS, RUWE, WHALEN, COLVIN, HALPERN, BEGHE, CHIECHI, LARO, AND FOLEY, JJ., agree with this opinion. VASQUEZ, J., did not participate in the consideration of this opinion. HAMBLEN, CHABOT, COHEN, SWIFT, JACOBS, GERBER, WRIGHT, PARR, WEL...|
|Case Date:||December 11, 1995|
|Court:||United States Tax Court|
As Corrected December 18, 1995
Decisions will be entered under Rule 155.
In 1987, P received $ 150,000 in compensatory damages and $ 500,000 in punitive damages pursuant to judgment on a claim for tortious interference with future employment, with statutory interest thereon, and $ 1.5 million in settlement of claims for tortious interference with future employment, libel, and invasion of privacy. P excluded all of these amounts from income under sec. 104(a)(2), I.R.C. R determined that the punitive damages and interest received from the judgment and $ 1.305 million of the settlement amount attributable to punitive damages were not excludable under sec. 104(a)(2), I.R.C., as damages received on account of personal injuries or sickness. P paid attorney's fees in connection with the litigation. Held : $ 500,000 of the settlement proceeds are properly characterized as punitive damages. Held, further, Commissioner v. Schleier, 515 U.S. __, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995), has effectively overruled our decision in Horton v. Commissioner, 100 T.C. 93 (1993), affd. 33 F.3d 625 (6th Cir. 1994), insofar as it held that punitive damages, even if noncompensatory, are excludable from income under sec. 104(a)(2), I.R.C., if the underlying claim is based on tort or tort-type rights, and to this extent we will no longer follow Horton v. Commissioner, Supra . Held, further, to the extent P's attorney's fees are allocable to the taxable portion of P's awards, they are deductible as a miscellaneous itemized deduction to which the provisions of sec. 67(a), I.R.C., are applicable. Held, further, the interest on the judgment award received by P is not excludable from income, but attorney's fees applicable to this portion of the award is deductible as miscellaneous itemized deductions.
Respondent determined a deficiency in petitioners' income tax for the calendar year 1987 in the amount of $ 488,976.31. The issues for decision are: (1) What portion, if any, of the amount of $ 1.5 million paid to Hughes Bagley (petitioner) in settlement of a suit against Iowa Beef Processors, Inc. (IBP), is allocable to punitive damages; (2) whether the $ 500,000 in punitive damages paid to petitioner pursuant to a judgment against IBP, and the portion, if any, of the $ 1.5 million paid to petitioner in settlement of his suit
against IBP which is allocable to punitive damages, are excludable from petitioner's income under section 104(a) (2)  as damages received on account of personal injuries; (3) whether the portion of the legal fees of $ 768,484.87 paid by petitioner during 1987 in connection with his suit against IBP, which was a contingency fee based on a percentage of the recovery, is properly to be offset against the recovery and, therefore, not includable in income, or is a miscellaneous itemized deduction subject to the adjustment for 2 percent of adjusted gross income under section 67(a); and (4) whether the portion of the legal fees paid by petitioner in 1987, which was computed on an hourly basis, is deductible by petitioner on Schedule C or is an itemized deduction to the extent deductible; (5) whether the amount of $ 48,575.34 of prejudgment and the amount of $ 282,772.41 of postjudgment interest paid to petitioner, pursuant to a judgment against IBP, are includable in petitioners' gross income.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioners, husband and wife, who resided in Sioux City, Iowa, at the time of the filing of their petition in this case, filed their Federal income tax return (Form 1040) for the calendar year 1987 with the Internal Revenue Service Center at Atlanta, Georgia.
Petitioner was vice president of retail sales development for IBP from October 1971 until July 1975. In July 1975 IBP terminated petitioner's employment, and in October 1975 IBP and petitioner entered into a settlement agreement resolving certain issues arising from the termination of petitioner's employment. When petitioner left IBP he took with him numerous documents (the Bagley documents), including IBP's weekly profit and loss statements, IBP's monthly production and sales reports, confidential legal memoranda, and memoranda outlining IBP's goals, marketing strategies, and pricing formulas. In late 1976 and early 1977, petitioner met with various individuals who were interested in the activities of
IBP, including several attorneys who were contemplating pursuing antitrust litigation against IBP. Petitioner discussed IBP's activities with the attorneys and provided them with access to the Bagley documents. On June 7, 1977, IBP filed a suit against petitioner and others in the U.S. District Court for the Northern District of Iowa seeking $ 4 million in damages and injunctive relief, including recovery of the Bagley documents (the IBP suit). The suit was Civil No. 77-4040 and was entitled Iowa Beef Processors, Inc. v. Amalgamated Meat Cutters & Butcher Workmen of N. Am., et al. The claims asserted in the suit against petitioner by IBP were breach of contract, breach of fiduciary duty, causing and assisting in another's breach of fiduciary duty, and conspiracy.
In late 1977 the Subcommittee on General Small Business Problems of the U.S. House of Representatives' Committee on Small Business (the subcommittee) initiated an investigation into the meat packing industry. The subcommittee's investigation focused in large part on the activities of IBP. In the course of its investigation, the subcommittee subpoenaed the Bagley documents and various witnesses, including petitioner, for oral testimony. Petitioner testified before the subcommittee on July 23 and 24, 1979. Petitioner's testimony tended to show that IBP was involved in monopolistic and questionable business practices.
IBP was invited to send a representative to the subcommittee's hearing, but declined to do so. On August 1, 1979, IBP, by its president Robert Peterson, responded to the subcommittee by a 31-page letter (the Peterson letter). The Peterson letter was in answer to testimony given to the subcommittee about IBP and its business practices. Approximately 14 pages of the Peterson letter addressed the testimony of petitioner. The Peterson letter not only addressed the business practices with respect to which petitioner testified, but also included statements which attacked petitioner's character and veracity. Among other things, the Peterson letter alleged that petitioner was " a disgruntled ex-IBP employee" who had " stolen IBP documents", and that petitioner's testimony was " absolutely false" and " constituted perjury", and was " a malicious attempt to blacken IBP's name and belatedly manufacture a defense to IBP's breach-of-fiduciary duty suit" (i.e., the IBP suit). The Peterson letter in essence called petitioner a liar and a thief. IBP sent a copy
of the Peterson letter to each member of the subcommittee and requested that it be made a part of the public record. At the time petitioner testified before the subcommittee, he was employed as vice president of Dubuque Packing Co. (Dubuque Packing). Petitioner's employment at Dubuque Packing was abruptly terminated on July 30, 1979. The contents of the Peterson letter had been widely reported by the media.
On October 4, 1979, petitioner filed a suit against IBP in the U.S. District Court for the Northern District of Iowa ( Bagley v. Iowa Beef Processors, Inc., Civil No. 79-4087) (the Bagley suit). In the complaint, petitioner asserted five claims against IBP. The five claims asserted were: (1) IBP's suit against petitioner constituted an abuse of process; (2) IBP tortiously interfered with an existing contract of employment by causing Dubuque Packing to terminate petitioner's employment; (3) IBP tortiously interfered with petitioner's future employment within the meat-packing industry; (4) IBP libeled petitioner by publishing and circulating the Peterson letter; and (5) IBP invaded petitioner's privacy. In the complaint, petitioner asked for $ 1.5 million in compensatory damages and $ 10 million in punitive damages.
The jurisdiction of the District Court in the IBP suit and the Bagley suit was based on diversity of citizenship. Some of the claims made by petitioner in his suit against IBP alleged physical injuries which he sustained as a result of IBP's conduct. Petitioner had suffered a heart attack after IBP took his deposition for 1 straight week. This was the third deposition of petitioner that IBP had taken. The IBP suit and the Bagley suit were consolidated for trial. Prior to trial, IBP voluntarily dismissed its claim for compensatory and punitive damages. Petitioner's abuse of process claim was dismissed prior to trial on the ground that the statute of limitations on that claim had expired. The remaining claims were tried before a jury between December 13 and December 29, 1982.
The District Court's instructions to the jury respecting libel, in part, stated that--
The words complained of by the plaintiff in the Peterson letter, specifically, that " he stole 7 boxes of IBP documents" and that " Bagley's version of IBP's quantity discount program is absolutely false, and...
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