87 T.C. 1294 (1986), 9270-83, Threlkeld v. C.I.R.
|Citation:||87 T.C. 1294|
|Opinion Judge:||GOFFE, JUDGE:|
|Party Name:||JAMES E. THRELKELD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||G. Keith Rogers, Jr., for the petitioner. Robert P. Crowther, for the respondent.|
|Judge Panel:||STERRETT, CHABOT, NIMS, PARKER, WHITAKER, SHIELDS, HAMBLEN, COHEN, CLAPP, JACOBS, WRIGHT, PARR, WILLIAMS, and WELLS, JJ., agree KORNER, SWIFT, and GERBER, JJ., did not participate in the consideration of this case.|
|Case Date:||December 08, 1986|
|Court:||United States Tax Court|
Petitioner settled a civil lawsuit for malicious prosecution and other claims for $300,000, of which the parties to the lawsuit allocated $75,000 to injury to petitioner's professional reputation. HELD: There is no valid distinction between damages received for injury to personal reputation and those received for injury to professional or business reputation for purposes of section 104(a)(2), I.R.C. 1954. Roemer v. Commissioner, 79 T.C. 398 (1982), revd. 716 F.2d 693 (9th Cir. 1983), will be no longer followed. HELD FURTHER: Damages received in settlement of a claim for malicious prosecution of a civil proceeding under Tennessee law are damages received on account of ‘ personal injuries.‘ Sec. 104(a)(2), I.R.C. 1954.
The Commissioner determined deficiencies in petitioner's Federal income taxes for the taxable years 1979 and 1980 in the amounts of $3,225.37 and $18,838.18, respectively. After concessions by the parties, the sole issue for decision is whether the amount of $21,500 received in 1980 in settlement of a suit for malicious prosecution that represented recovery for injury to petitioner's professional
reputation is excludable from income under section 104(a)(2). 
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts and accompanying exhibits are incorporated by this reference.
Petitioner filed a Federal income tax return for the taxable year 1980 with the Internal Revenue Service Center, Memphis, Tennessee. Petitioner was a resident of Memphis, Tennessee, at the time he filed his petition in this case.
In May 1975, J.B. Williams (Williams) a Texas resident, filed a lawsuit against petitioner and a codefendant in the Chancery Court of Shelby County, Tennessee, alleging fraud in connection with a real estate sales contract. Petitioner counterclaimed against Williams seeking specific performance of the contract. The court subsequently found for petitioner and his codefendant both upon Williams' claim for rescission and upon defendants' counterclaim for specific performance and awarded the defendants a judgment in the amount of $1,283,527.07. The judgment of the chancery court was upheld on appeal and the Supreme Court of Tennessee denied an application for a writ of certiorari filed by Williams.
On May 10, 1979, petitioner filed suit in the United States District Court for the Western District of Tennessee against Williams with jurisdiction being based upon diversity of citizenship. Petitioner alleged that Williams ‘ instituted, continued, and prosecuted his claims‘ in the suit before the Chancery Court of Shelby County, Tennessee, ‘ without probable cause and with malice.‘ Petitioner also alleged that Williams' actions in bringing the suit for rescission in the chancery court caused petitioner various injuries described as follows:
* * * Plaintiff was subjected to indignity, humiliation, inconvenience, and pain and distress of mind, was prevented from attending to his usual professional pursuits, incurred expenses and costs in defending Defendant's
claims in and pertaining to the chancery suit, suffered injury to his professional reputation, and suffered injury to his credit reputation.
Petitioner's complaint included a prayer for compensatory damages in the amount of $250,000 and punitive damages in the amount of $1 million.
After instituting the suit for malicious prosecution against Williams in Federal court, petitioner filed two other lawsuits against Williams, his wife, Jean Proctor Williams, and others. These suits alleged that certain fraudulent conveyances of property were made in an attempt to insulate those properties from petitioner's judgment obtained in the original chancery court suit.
On December 8, 1980, petitioner and the Williamses, entered into an agreement settling the suit for malicious prosecution. As part of the same agreement petitioner agreed to release all other pending claims. Petitioner also agreed to assign the original chancery court judgment. As total consideration in settlement of his various claims, petitioner was to receive $300,000 allocated as follows:
(b) For the release by Threlkeld of his claims against J.B. Williams asserted in » the malicious prosecution actionï¿½ for damage to Threlkeld's professional reputation, * * * $75,000.00.
(c) For the release by Threlkeld of his claims against J.B. Williams asserted in » the malicious prosecution actionï¿½ for damage to Threlkeld's credit reputation, * * * $75,000.00.
(d) For the release by Threlkeld of his claims against J.B. Williams asserted in » the malicious prosecution actionï¿½ for indignity, humiliation, inconvenience, and pain and distress of mind, * * * $74,980.00.
* * *
(f) For the assignment of the Judgment by Threlkeld * * * $75,000.00.
The settlement agreement also allocated $10 each as consideration for the release by petitioner of two suits alleging fraudulent conveyances by Williams that were intended to defeat the execution of the judgment for specific performance. No amount was characterized as payment for punitive damages.
In 1980, petitioner received $86,000 of the total settlement of $300,000, of which $21,500 represented a portion of the amount allocated to the damage to professional reputation. He received the remainder of the $300,000 settlement in 1981.
On his individual Federal income tax return for the taxable year 1980, petitioner reported $1,500 as long-term taxable gain from the portion of the settlement relating to the decree of specific performance. He did not report as taxable income for the taxable year 1980 any other portion of the $86,000 he received.
In his statutory notice of deficiency for the taxable years 1979 and 1980, the Commissioner determined deficiencies in petitioner's income tax of $3,225.37 and $18,838.18, respectively. The deficiency for the taxable year 1980 resulted, in part, by increasing petitioner's taxable income in the amount of $55,902 representing unreported income received as part of the settlement agreement. After concessions by the parties, the sole remaining issue is the excludability of the $21,500 received by petitioner in 1980 as payment for injury to his ‘ professional reputation.‘
We are called upon to decide whether an amount received that was specified as a recovery for injury to petitioner's professional reputation arising out of a claim of malicious prosecution is excludable from taxable income under section 104(a)(2).
Section 61 provides that, except as otherwise provided, gross income means ‘ all income from whatever source derived.‘ Section 104(a)(2) provides that ‘ the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness‘ is excludable from gross income. The regulations promulgated under section 104(a)(2) provide that ‘ damages received‘ means an amount received from an action based upon tort or tort type rights. Sec. 1.104-1(c), Income Tax Regs. The law is well settled that the tax consequences of an award for damages depend upon the nature of the litigation and on the origin and character of the claims adjudicated, and not upon the validity of those claims. Bent v. Commissioner, 87 T.C. ___ (filed July 28, 1986) (slip opinion at pages 13-14); Glynn v. Commissioner, 76 T.C. 116, 119 (1981), affd. without published opinion 676 F.2d 682 (1st Cir. 1982); Seay v. Commissioner, 58 T.C. 32, 37 (1972). No distinction is made between physical and nonphysical (mental or emotional) injuries. Seay v. Commissioner, supra at 40. However, in the
case of damages awarded in defamation suits, this Court has drawn a distinction between damages received for an injury to personal reputation and those received for injury to professional reputation. One of our recent opinions setting forth this distinction was reversed by the Court of Appeals for the Ninth Circuit. Roemer v. Commissioner, 716 F.2d 693 (9th Cir. 1983), revg. 79 T.C. 398 (1982). Based upon our careful consideration of the opinion of the Court of Appeals in Roemer v. Commissioner, supra, and after close scrutiny of all of our decisions in this area, we conclude that, for purposes of section 104(a)(2), there is no justification for continuing to draw a distinction, in tort actions, between damages received for injury to personal reputation and damages received for injury to professional...
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