Roemer v. C.I.R.

• Decision Date: 22 September 1983
• Docket Number: No. 82-7695,82-7695
• Citation: 716 F.2d 693
• Parties: 83-2 USTC P 9600, 9 Media L. Rep. 2407 Paul F. ROEMER, Jr. and Marcia E. Roemer, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 693

716 F.2d 693

83-2 USTC P 9600, 9 Media L. Rep. 2407

Paul F. ROEMER, Jr. and Marcia E. Roemer, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 82-7695.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 14, 1983.

Decided Sept. 22, 1983.

John Gigounas, San Francisco, Cal., for petitioners-appellants.

Jay W. Miller, Washington, D.C., for respondent-appellee.

Appeal from the Decision of the United States Tax Court.

Before ALARCON, CANBY, and REINHARDT, Circuit Judges.

ALARCON, Circuit Judge:

Paul F. Roemer Jr. (Roemer) and Marcia E. Roemer appeal a decision of the United States Tax Court upholding a determination of deficiencies for their 1975 taxable year. Marcia E. Roemer is a party solely because she signed a joint income tax return with her spouse.

We must decide whether the defamation of an individual constitutes a personal injury for purposes of I.R.C. Sec. 104(a)(2) (personal injury damages excludable from gross income). As we disagree with the tax court's treatment of the lump-sum award of damages in a defamation suit, we reverse.

FACTS

Paul F. Roemer Jr. started his own insurance business in 1952 in Oakland, California, where he had lived all his life. In order to build clientele, Roemer became a member of numerous social, civic and professional organizations. By the mid-1960's, he enjoyed an excellent personal and professional reputation in the community. His gross annual income had risen to approximately $300,000 (about one-half of which represented his net income).

In 1965, Roemer applied for an agency license from Penn Mutual Life Insurance Company (Penn Mutual). In the course of reviewing Roemer's application, Penn Mutual requested a credit report from Retail Credit Company (Retail Credit). Retail Credit prepared the report and sent it to Penn Mutual and other insurance companies.

The credit report was grossly defamatory. Roemer's honesty was questioned. In addition, the report falsely stated that Roemer neglected his client's affairs, that he was recently fired from his position as president of an insurance firm, and that he intentionally defaced property belonging to others. Roemer demanded a retraction of the report. Retail Credit's purported retraction, however, contained further defamatory innuendos. Roemer was denied agency licenses to sell life insurance by Penn Mutual and other companies as a direct result of Retail Credit's report. His general reputation in the community where he resides and works also suffered because most of his clients were also his friends.

Roemer brought an action in a California court for libel under section 45 of the California Civil Code. Section 45 provides as follows: "Libel is a false and unprivileged publication by writing, printing, picture, effigy, or other fixed representation to the eye, which exposes any person to hatred, contempt, ridicule, or obloquy, or which causes him to be shunned or avoided, or which has a tendency to injure him in his occupation." In his complaint for libel Roemer alleged that the defendant's defamatory publication was done "with intent to damage his reputation, and to injure him in his business profession and occupation." Roemer's attorney argued to the jury that in fixing damages the jury should consider that prior to the defamation the plaintiff had an excellent character and that his reputation in both the insurance industry and his personal life was excellent. In closing argument, the jury was told that Roemer had lost $136,000 in prospective income as the result of the libel. The jury found that Retail Credit had committed libel and awarded Roemer compensatory damages of $40,000 and punitive damages of $250,000. ¹ The judgment was upheld on appeal in Roemer v. Retail Credit Co., 44 Cal.App.3d 926, 119 Cal.Rptr. 82 (1975). At trial the only defense was that of a qualified privilege claimed by the defendant under California Civil Code, section 47, subdivision 3 (a communication, without malice, between interested persons is privileged and therefore not defamation).

The jury was not asked to specify whether the damages were awarded as compensation for injury to Roemer's personal or professional reputation, nor did the jury allocate the award between Roemer's personal injury and his economic loss. The jury was instructed, however, that in determining the amount of actual or compensatory damages, it could "take into consideration the grief, anguish, mental suffering, mortification and humiliation which Plaintiff has undergone and suffered by reason of the Defendant's publication." The jury was also told that in awarding general and compensatory damages it could consider "the prominence of the Plaintiff in the community in which he lives, his social standing, his family status or any mental suffering proximately resulting from the defamation."

On Roemer's 1975 federal tax return, he reported $16,020 of the damages awarded in the defamation action as income. The Commissioner of Internal Revenue determined that the entire judgment received by Roemer should have been included in gross income with a deduction for all costs and attorneys' fees and assessed a deficiency of $32,980 against Roemer. The tax court, in an opinion by Judge Dawson reviewed by the court with three judges dissenting, upheld the Commissioner's determination. The tax court ruled that: (1) the compensatory damages were not excludable from gross income under I.R.C. Sec. 104(a)(2), because the taxpayer had failed to establish that the compensatory damages were received for injury to his personal reputation; (2) the punitive damages were also includable in gross income, since the tax court found that the compensatory damages were intended to reimburse the taxpayer for injury to his professional reputation; (3) both the compensatory and the punitive damages were taxable as ordinary income; and (4) the issue whether the costs were excludable from gross income as a recovery of capital or includable and deductible under I.R.C. Sec. 212 was moot in the context of this case. Roemer v. Commissioner, 79 T.C. 398 (1982).

ANALYSIS

A. Compensatory Damages

1. Tax Treatment of Personal Injury Damages

I.R.C. Sec. 61(a) defines gross income as "all income from whatever source derived." All realized accessions to wealth are presumed to be taxable income, unless the taxpayer can demonstrate that an acquisition is specifically exempted from taxation. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430, 75 S.Ct. 473, 476, 99 L.Ed. 483 (1955) (Congress intended to tax all gains except those specifically exempted).

Since 1918 Congress has expressly excluded from gross income tort damages received on account of personal injuries. ² Revenue Act of 1918, Sec. 213(b)(6), 40 Stat. 1066. An individual who wins a personal injury suit is usually given a lump-sum award that includes an amount for items that ordinarily would be taxable, such as lost income. Although it might be logical to allocate a lump-sum award between its excludable and taxable components, the Commissioner has long excluded from income the entire monetary judgment. See Sol.Op. 132, I-1 C.B. 92, 93 (1922) (rights invaded and money value are incomparable, cannot tax any portion of sum received). The rationale behind the exclusion of the entire award is apparently a feeling that the injured party, who has suffered enough, should not be further burdened with the practical difficulty of sorting out the taxable and nontaxable components of a lump-sum award. Note, Taxation of Damages Recoveries from Litigation, 40 Cornell L.Q. 345, 346 (1955).

The dispositive issue on this appeal is whether Roemer's lump-sum recovery of damages in his defamation action against Retail Credit is excludable from gross income under I.R.C. Sec. 104(a)(2) as damages received "on account of personal injuries." The tax court found that the defamatory statements predominantly resulted in a loss of income to Roemer caused by damage to his professional reputation. The court held that damages received in a defamation action are includable in gross income to the extent that they are measured by the effect on an individual's professional reputation. Damages are excludable from gross income to the extent a taxpayer can show that the damages, including amounts for lost income, were received for an injury to the individual's personal reputation.

Whether the tax court drew a proper distinction between personal reputation and professional reputation for purposes of I.R.C. Sec. 104(a)(2) is a question of law subject to de novo review on appeal. I.R.C. Sec. 7482(a); Estate of Franklin v. Commissioner, 544 F.2d 1045, 1047 n. 3 (9th Cir.1976). This court may modify or reverse a decision of the tax court that is not in accordance with the law. I.R.C. Sec. 7482(c)(1). We reverse because we have concluded that the tax court's analysis of this matter confuses a personal injury with its consequences and illogically distinguishes physical from nonphysical personal injuries.

When an individual recovers damages for a physical personal injury, the lump-sum award is not allocated between the personal aspects of the injury and the economic loss occasioned by the personal injury, nor is the taxpayer precluded from use of Sec. 104(a)(2) when the predominant result of the injury is a loss of income. However, when the injury is nonphysical, as is defamation, the majority of the tax court would require the taxpayer to allocate an award between the excludable and the otherwise taxable components of the damages. 79 T.C. at 405-06.

The relevant distinction that should be made is between personal and nonpersonal injuries, not between physical and nonphysical injuries. I.R.C. Sec. 104(a)(2) states that damages received on account of personal injuries are excludable; it says nothing about physical injuries. "[T]he words of statutes--including revenue acts--should be interpreted where possible in...