79 T.C. 398 (1982), 949-80, Roemer v. C.I.R.

Docket Nº:949-80.
Citation:79 T.C. 398
Opinion Judge:DAWSON, Judge:
Attorney:John Gigounas and Edward B. Simpson, for the petitioners. Donna I. Epstein, for the respondent.
Judge Panel:FORRESTER, J., dissenting: KORNER, J., agrees with this dissent. WILBUR, J., I respectfully dissent.
Case Date:August 30, 1982
Court:United States Tax Court

Page 398

79 T.C. 398 (1982)




No. 949-80.

United States Tax Court

August 30, 1982

         P, an insurance broker, received a jury award of $40,000 for compensatory damages and $250,000 for punitive damages arising out of a libel suit. Held :

         1. P has failed to prove that the compensatory damages were received on account of personal injuries and excludable from his gross income under section 104(a)(2), I.R.C. 1954, because the damages were primarily to his professional and business reputation.

         2. The punitive damages are not excludable under section 104(a)(2) from petitioner's gross income.

         3. Both the compensatory and punitive damages are taxable as ordinary income.

         4. The issue of costs raised by P is moot.


Page 398

          John Gigounas and Edward B. Simpson, for the petitioners.

          Donna I. Epstein, for the respondent.

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          DAWSON, Judge:

         Respondent has determined a deficiency of $32,908 in petitioners' Federal income tax for the year 1975.

         Concessions have been made by the parties. The issues presented for decision are:

         1. Whether petitioner Paul F. Roemer, Jr., is entitled under section 104(a)(2)[1] to exclude from his gross income for 1975 compensatory damages of $40,000 received as a result of a favorable jury verdict in a libel suit.

         2. Whether punitive damages of $250,000 in the same libel suit are likewise excludable from petitioner's gross income as having been received on account of personal injuries.

         3. If the compensatory and punitive damages are includable in petitioner's gross income, whether they should be treated, in whole or in part, as ordinary income or capital gain.

         4. Whether costs of $7,751 are includable in petitioner's gross income and, if so, whether they are deductible under section 212.


         Some of the facts have been stipulated and are so found.

         Petitioners are husband and wife who resided in Piedmont, Calif., at the time their petition herein was filed. They timely filed a joint Federal income tax return for 1975 with the Internal Revenue Service Center in Fresno, Calif. Marcia E. Roemer is a party to this proceeding solely by virtue of having filed a joint return with her husband. Consequently, Paul F. Roemer, Jr., shall hereinafter be referred to as petitioner.

         Petitioner is, and has been since 1941, an independent insurance broker. In 1952, he started his own insurance business in the area of Oakland, Calif., where he had lived all of his life. In an effort to build clientele, he worked out of the offices of a real estate broker and became a member of numerous social and civic organizations as well as professional associations.

         By the mid-1960's petitioner, then doing business as Paul F. Roemer, Jr., Inc., enjoyed an excellent reputation in the community, both personally and professionally. His gross

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income at that time had risen to approximately $300,000 (about one-half of which represented his net income).

         Until 1965, petitioner sold primarily casualty insurance, but at that time he had an opportunity to expand into the field of selling life insurance. Gordon Maxson, an expert in the life insurance business and both a business associate and friend of petitioner's, persuaded petitioner to seek authorization from the Penn Mutual Life Insurance Co. (hereinafter Penn Mutual) so that they could form a partnership for the sale of casualty and life insurance and work on certain insurance matters. Petitioner applied for an agency license from Penn Mutual to sell life insurance. In the course of reviewing that application, a credit report was sought from Retail Credit Co. (hereinafter Retail Credit). Retail Credit subsequently prepared such a report and sent it to Penn Mutual and other insurance companies. The report on petitioner was grossly defamatory in nature. It falsely stated, among other things, that petitioner was ignorant in insurance matters, neglected his clients' affairs, was recently fired from his position as president of an insurance firm, and intentionally defaced property belonging to others. The report also questioned petitioner's honesty, implying that he misappropriated funds belonging to others for his personal benefit.

         Upon learning of the defamatory report, petitioner demanded that Retail Credit issue a retraction. Thereupon, Retail Credit distributed to those companies which had received the original publication a letter and purported retraction which in fact contained further false and defamatory innuendos regarding petitioner's general business and personal character and his fitness as an insurance agent.

         As a result of Retail Credit's report, petitioner was denied agency licenses to sell life insurance by Penn Mutual and other insurance companies. Furthermore, his then-existing business relationships were damaged, as well as his ability to attract new clients. This was due in part to the nature of his business because most of his friends were also his clients, and vice versa. Retail Credit's report thus caused his insurance profits to diminish and his business reputation to be damaged.

         On May 14, 1965, petitioner filed a complaint for damages against Retail Credit in the Superior Court for Alameda County, Calif. He alleged that the publication of the Retail

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Credit report damaged his good reputation as a licensed insurance broker, and it caused him " to lose insurance business from Penn Mutual Life Insurance Company" and to lose " further profits from similar business with other insurance companies." He sought general damages of $50,000. In an amended complaint filed in November 1967, the petitioner alleged that the securing of insurance customers and credit was dependent upon his " business reputation, credit standing and financial responsibility." Paragraph III of the amended complaint alleged:

          That at all times prior to the publication of the matters herein complained of, plaintiff has enjoyed a good name and business reputation, both generally and in particular with respect to high standards of business, service rendered to clients, credit standing, honesty, integrity, financial responsibility; that by reason of this excellent name and reputation, plaintiff has enjoyed the continued patronage of his clients and of insurance companies he represents; that the continued patronage of plaintiff and the respect of his clients and companies depends on the good name and reputation of plaintiff for honesty, integrity, quality of service, financial responsibility, credit standing and high standards of business practice.

         In paragraph VIII of the amended complaint, it is alleged that the publication by Retail Credit was done " with intent to damage his reputation, and to injure him in his business profession and occupation" and that he was generally damaged in the total sum of $136,000. Punitive damages were claimed in the amount of $840,000.

         At the trial of the State court libel suit, the petitioner produced evidence of his exemplary background and reputation in the insurance field and about the growth and profitability of his business. He told the jury of his proposed business relationship with Gordon Maxson which would have expanded his casualty insurance business to include life insurance. He told the jury about applying for an agency license with Penn Mutual so that his proposed partnership with Mr. Maxson could be effectuated and how the relationship fell through because of the negative, false, and defamatory " agency qualification" report sent to Penn Mutual by Retail Credit. He told the jury that other insurance licenses were denied him as a result of the defamatory qualification report. He told the jury that he lost income as a direct result of the false report. He described in detail to the jury how the defamatory report affected his business relations, but said little, if anything,

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about how it affected his personal affairs. The evidence presented through many witnesses in the trial of the libel suit was primarily directed at how the petitioner's business relationships and planned business ventures were harmed by the false report of Retail Credit. There was no testimony by the petitioner or others in the libel suit that the libelous report was published anywhere outside of the insurance industry.

         Petitioner's counsel in the libel suit presented the following arguments to the jury regarding the amount of damages the petitioner should be awarded as a result of the defamation: (1) Petitioner had an excellent character, and his reputation throughout the years prior to the defamation, in both the insurance industry and his personal life, was also excellent; (2) the defamatory publication prevented the petitioner from being licensed by Penn Mutual and prevented him from doing business with Gordon Maxson and others; (3) petitioner suffered severe damage to his general reputation; (4) the defamation caused him shock, embarrassment, shame, anxiety, and worry; and (5) punitive damages were warranted by reason of the severity of the statements made and the malice shown on the part of Retail Credit.

         Petitioner's counsel did not argue to the jury that separate amounts should be awarded for damages to petitioner's business reputation and to his personal reputation. Nor did counsel request a verdict dividing the " compensatory" damages between those which were " general" (personal injuries) and " special" (loss of business profits and reputation) in accordance...

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