Stocks v. Comm'r of Internal Revenue

• Decision Date: 02 January 1992
• Docket Number: Docket No. 9303-88.
• Citation: 57 Fair Empl.Prac.Cas. (BNA) 1039,98 T.C. No. 1,98 T.C. 1
• Parties: ELEANOR L. AND JAMES A. STOCKS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

57 Fair Empl.Prac.Cas. (BNA) 1039

98 T.C. 1

98 T.C. No. 1

ELEANOR L. AND JAMES A. STOCKS, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9303-88.

United States Tax Court

Filed January 2, 1992.

Petitioner wife (W) was a tenured associate professor at College S. In July 1983 and September 1983, W filed racial discrimination charges against College S with State and Federal agencies; W did not bring court suits on those charges. College S did not rehire W for the 1984-1985 school year, and failed to notify W of its intentions by February 1, 1984, as required by its faculty handbook. In 1984, W and College S entered into a settlement agreement whereby College S paid $24,000 to W in settlement of all claims against College S.

1. HELD: The payment was received on account of a potential breach of contract claim and also on account of a potential racial discrimination claim. Petitioners may exclude from gross income the portion of the payment which was received on account of the potential racial discrimination claim. Amounts allocated. Sec. 104(a)(2), I.R.C. 1954.

2. HELD, FURTHER, petitioners may deduct the portion of W's legal expense which is allocable to the portion of the settlement payment which is not excludable from income; they may not deduct the portion allocable to the excludable portion of the payment. Amounts allocated. Sec. 265, I.R.C. 1954. W. Michael Conway, for petitioners.

Roderick H. Fillinger, for respondent.

CHABOT, JUDGE:

Respondent determined a deficiency in Federal individual income taxes against petitioners for 1984 in the amount of $9,518, ¹ and additions to tax under section 6653(a)(1) (negligence, etc.) in the amount of $475.90, under section 6653(a)(2) in the amount of 50 percent of the interest on $9,518, and under section 6661(a) (substantial understatement of income tax) in the amount of $2,379.50.

After concessions, ² the issues for decision are as follows:

(1) Whether petitioners may exclude from gross income under section 104(a)(2) any part of the $24,000 received pursuant to a settlement agreement and, if so, then how much;

(2) Whether petitioners are entitled to deduct any part of the legal expenses paid in connection with the settlement agreement and, if so, then how much.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

When the petition was filed in the instant case, petitioners Eleanor L. Stocks (hereinafter sometimes referred to as Stocks) and James A. Stocks, wife and husband, resided in Dayton, Ohio.

STOCKS' EMPLOYMENT BACKGROUND

Stocks, a black woman, began working for Sinclair Community College (hereinafter sometimes referred to as Sinclair) in 1972 as a part-time instructor. In September 1973 she began working full-time for Sinclair as an instructor in the Early Childhood Education Department (hereinafter sometimes referred to as the Department). About 1976 Stocks was promoted to assistant professor, and about 1978 she was promoted to associate professor. Stocks was a tenured associate professor at all times relevant to the instant dispute.

The chairperson of each department at Sinclair made an annual performance review of each professor. About 1980 Bonnie Johnson (hereinafter sometimes referred to as Johnson) became chairwoman of the Department. Johnson gave a performance rating to Stocks that was lower than Stocks' past ratings. Stocks wrote a letter to the dean, which letter was later presented to the president of Sinclair, and the low rating was changed to a higher rating. Johnson became dean of the division (Extended Learning & Human Services) that included the Department. The next chairwoman of the Department, Donna Murphy, gave high ratings to Stocks. In 1983 Karen Winston (hereinafter sometimes referred to as Winston) became chairwoman of the Department. Winston began documenting concerns regarding Stocks' performance as a professor, including Stocks' allegedly not keeping certain required office hours, “splitting” her office hours, shortening class periods, and not making required visits to observe Stocks' student teachers.

STOCKS' DISCRIMINATION CHARGES

On July 13, 1983, Stocks filed a Charge of Discrimination (hereinafter sometimes referred to as the First Charge) with the Ohio Civil Rights Commission (hereinafter sometimes referred to as the OCRC), with instructions that the First Charge was also to be filed with the United States Equal Employment Opportunity Commission (hereinafter sometimes referred to as the EEOC). In the First Charge, Stocks alleged that she had been discriminated against on the basis of race when Sinclair selected a white person to teach a certain course even though Stocks had asked to teach that course and had taught that course before. Before filing the First Charge, Stocks had contacted an attorney, Richard Austin (hereinafter sometimes referred to as Austin), who was at that time the president of the Dayton chapter of the National Association for the Advancement of Colored People (hereinafter sometimes referred to as the NAACP). Stocks filed the First Charge without Austin's help. In relation to the First Charge, the OCRC issued a letter of no probable cause, and a 90-day right-to-sue letter. Stocks did not file a lawsuit against Sinclair with respect to the First Charge.

In September 1983, Stocks filed a second Charge of Discrimination (hereinafter sometimes referred to as the Second Charge) with the OCRC and the EEOC. In the Second Charge, Stocks alleged that she had been discriminated against on the basis of race, and also alleged “retaliation”. Stocks alleged that she was discriminated against when her August 1983 pay was docked because she took 6 days of personal (nonmedical) leave in May. In the Second Charge, Stocks stated that she was told that unless she had a statement from a physician, her pay would be docked. She alleged that, in contrast, white faculty members had taken personal leave without being required to present medical statements. The OCRC issued a letter of no probable cause with respect to the Second Charge. Stocks and Austin wrote a letter to the OCRC appealing the no- probable-cause letter. It is unclear whether a 90-day right-to-sue letter was issued. Stocks did not file a lawsuit against Sinclair with respect to the Second Charge.

Sinclair was aware that these charges had been filed. Ned Sifferlen (hereinafter sometimes referred to as Sifferlen), Sinclair's vice president for instruction, met with representatives from the OCRC in 1983 to discuss the charges made by Stocks. After this meeting an investigator with the OCRC told Sifferlen not to worry about the charges.

STOCKS' CONTRACT NOT RENEWED

In November 1983 Winston gave to Stocks an overall rating of unsatisfactory on Sinclair's annual Faculty Performance Review for the period January-September 1983. Johnson recommended to Sifferlen that Stocks' employment at Sinclair be terminated. Under normal procedures, in such a situation the tenured faculty member, the department chairperson, and the division dean were to meet to produce a “professional growth plan” which, if adhered to, would result in the faculty member's not receiving an unsatisfactory rating the next year. According to Sinclair's handbook, a professor's employment is not terminated unless the professor receives an overall rating of unsatisfactory 2 years in a row. Stocks continued to teach at Sinclair during the 1983-1984 school year. Stocks, Winston, and Johnson were not able to produce a professional growth plan. Stocks did not use Sinclair's administrative grievance process.

In June 1984 when Sinclair sent out teaching contracts for the 1984-1985 school year, Sifferlen decided not to send a contract to Stocks.

Stocks received a letter from Sifferlen asking her to meet with him about her employment status. As a result, Stocks and Sifferlen met in June 1984 to discuss Stocks' employment during the following school year.

Sinclair's faculty handbook provided that if a faculty member was not going to be rehired for a school year, notice must be given to the faculty member before February 1 of the year in which the contract expired. No notice was given to Stocks before February 1, 1984, that she would not be rehired for the 1984-1985 school year.

STOCKS' DEPOSITION

Sinclair took Stocks' deposition on August 21, 1984. The questioning was entirely by Sinclair's lawyer, and centered on Stocks' unsatisfactory rating on Sinclair's annual Faculty Performance Review and Sinclair's concerns in regard to Stocks' performance during the winter and spring quarters. At the end of the deposition, Sinclair's lawyer asked if Stocks had anything further that she wanted to say. Stocks responded by first reminding Sinclair's lawyer that she had filed two civil rights claims and then stated that the underlying cause of the contentions about Stocks' performance was racial discrimination. The questioning concluded with the following colloquy:

Q. [Sinclair's lawyer] I would like to say one more thing for the record.

With respect to the items that you just listed for us that amount to allegations of race discrimination, am I to understand that you do have the factual support for those allegations?

A. [Stocks] The ones I read to you, I think so. I think that I could -- In fact, the Civil Rights Commission has the proposal in terms of -- Yes, we can deal with those.

During the deposition, Stocks did not make references to Sinclair's lack of timely notice of termination. Stocks viewed the deposition as an opportunity to clear up past problems and to possibly continue her employment with Sinclair.

Sifferlen had not read the deposition transcript as of the time of his testimony at the trial in the instant case. However, Sinclair's lawyer had given to Sifferlen a general description of the deposition.

As of August 31, 1984, Sinclair had not yet decided to terminate Stocks' employment.

At the...