Church v. Comm'r of Internal Revenue , Docket No. 15630–80.

CourtU.S. Tax Court
Writing for the CourtFAY
Citation80 T.C. No. 60,9 Media L. Rep. 1883,80 T.C. 1104
Decision Date20 June 1983
Docket NumberDocket No. 15630–80.
PartiesWADE E. CHURCH AND MARGARET CHURCH, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

80 T.C. 1104
80 T.C. No. 60
9 Media L. Rep. 1883

WADE E. CHURCH AND MARGARET CHURCH, PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 15630–80.

United States Tax Court

Filed June 20, 1983.


In 1959, petitioner Wade E. Church, attorney general for the State of Arizona, delivered a speech to the American Federation of Labor convention held in Flagstaff, Ariz. In the speech, he criticized the influence exerted by certain lobbyist groups on the Arizona State Legislature. Several days later, the Arizona Republic, a daily newspaper out of Phoenix, Ariz., published a front-page editorial labeling petitioner a ‘communist.’ Petitioner sued the publisher for defamation. After protracted litigation, petitioner received an award of $250,000 for compensatory damages, $235,000 for punitive damages, and $140,872.71 for interest. Petitioner incurred attorneys' fees and court costs in the course of litigation. Held, the entire $250,000 in compensatory damages is excludable from gross income under sec. 104(a)(2), I.R.C. 1954. Roemer v. Commissioner, 79 T.C. 398 (1982), on appeal (9th Cir., Nov. 15, 1982), distinguished. Held, further, attorneys' fees and costs of litigation are nondeductible under sec. 265(1), I.R.C. 1954, to the extent they are allocable to tax exempt income.

[80 T.C. 1105]

A. Donald Chaney and Jay I. Bartz, for the petitioners.

Michael Kevin Phalin, for the respondent.

OPINION
FAY, Judge:

Respondent determined a $177,995.70 deficiency in petitioners' 1976 Federal income tax. The only issues for our decision are (1) whether petitioner Wade E. Church is entitled to exclude from his gross income compensatory damages of $250,000 received as a result of a favorable jury verdict in a defamation suit, and (2) the extent to which attorneys' fees and costs paid in the course of litigation are deductible.

All the facts are stipulated and found accordingly.

Petitioners Wade E. Church and Margaret Church resided in Phoenix, Ariz., at the time their petition was filed herein.

In 1958, Wade E. Church (petitioner) was elected to the office of attorney general for the State of Arizona for a term of 2 years commencing January 1, 1959. On May 7, 1959, petitioner addressed the American Federation of Labor convention in Flagstaff, Ariz. He delivered his speech before some 500 to 600 delegates to the convention as well as various members of the news media. The speech dealt with what petitioner perceived as a problem of public concern, namely, the excessive influence of certain lobbyist groups upon the Arizona State Legislature.

In response to petitioner's speech, a front-page editorial appeared in the Monday, May 11, 1959, edition of the Arizona Republic under the heading ‘Communism and Mr. Church.’ The editorial made various references by which petitioner was tied to communism. The Arizona Republic is a daily newspaper

[80 T.C. 1106]

published in Phoenix, Ariz., and is distributed throughout the State.

Petitioner filed a complaint for libel against Phoenix Newspapers Inc., publisher of the Arizona Republic.1 Petitioner's amended complaint sought compensatory damages of $250,000 and punitive damages of $250,000. After protracted litigation, petitioner's suit was heard by a jury in Maricopa County Superior Court from June 9, 1971, through June 16, 1971. The jury awarded petitioner compensatory damages of $250,000 and punitive damages of $235,000. The jury gave no indication of the basis upon which they arrived at the award. The verdict and award were affirmed by the Arizona Court of Appeals on July 15, 1975.

In 1976, petitioner received full payment for the award plus interest in the amount of $140,872.71. He also paid attorneys' fees and court costs of $253,568.85 in connection with the suit. The issues are the taxability of the awards for both compensatory and punitive damages, and the deductibility of the costs of litigation. Due to respondent's concession (see note 7 infra), we need only address the taxability of the compensatory damages.

Compensatory Damages

Section 104(a)(2)2 excludes from income any damages received on account of personal injuries or sickness. Petitioners contend the $250,000 jury award herein was based on personal injury within the meaning of section 104(a)(2). Respondent contends that our recent decision in Roemer v. Commissioner, 79 T.C. 398 (1982), on appeal (9th Cir., Nov. 15, 1982), mandates a result in his favor. We find the facts in Roemer v. Commissioner, supra, clearly distinguishable, and, further, we hold for petitioners.

Damages received on account of personal injuries or sickness are not limited to physical trauma but include mental pain and suffering. Seay v. Commissioner, 58 T.C. 32 (1972); Hawkins v. Commissioner, 6 B.T.A. 1023 (1927); sec. 1.104–1(c), Income Tax Regs., cf Roemer v. Commissioner, supra. The tax

[80 T.C. 1107]

consequences of an award depend on the nature of the litigation and the claims adjudicated. Woodward v. Commissioner, 397 U.S. 572 (1970); United States v. Gilmore, 372 U.S. 39 (1963). The proper inquiry is in lieu of what are the damages awarded. Fono v. Commissioner, 79 T.C. 680 (1982); Roemer v. Commissioner, supra; Wolfson v. Commissioner, 651 F.2d 1228 (6th Cir. 1981), affg. and remanding T.C. Memo. 1978–445; Raytheon Production Corp. v. Commissioner, 144 F.2d 110, 113 (1st Cir. 1944), affg. 1 T.C. 952 (1943). To ascertain the nature of the damages, it is necessary in this case to examine the allegations contained in petitioner's original and amended complaints, the evidence presented, and the arguments made in the State court proceeding.3

Petitioner's amended complaint sought compensatory damages of $250,000 and alleged that, at the time of publication, defendants knew petitioner enjoyed an excellent reputation both as a private citizen and as a public officer, and the editorial was published for the purpose of ruining that reputation. The amended complaint further alleged that defendants did maliciously expose petitioner to—

public hatred, contempt, ridicule and obliquy [sic] and did deprive him of public confidence and embarrass him publicly,

and as a result petitioner had suffered—

an enormous amount of embarrassment humiliation and mental agony, and has been held in contempt, calumny and ridicule and as a consequence thereof, has been exceedingly nervous and upset, and further,...

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50 practice notes
  • Miller v. Comm'r of Internal Revenue, Docket No. 21113-87.
    • United States
    • United States Tax Court
    • September 13, 1989
    ...Sec. 1.104-1(c), Income Tax Regs. Thus, section 104(a)(2) does not exclude only recoveries for physical injury. Church v. Commissioner, 80 T.C. 1104, 1106 (1983). Rather, the proper inquiry is whether damages have been recovered for personal injury. The very purpose of section 104(a)(2) is ......
  • Kovacs v. Comm'r of Internal Revenue, Nos. 5617–90 to 5620–90.
    • United States
    • United States Tax Court
    • February 24, 1993
    ...paid on an award of “damages” received on account of personal injury is excludable under section 104(a)(2). See Church v. Commissioner, 80 T.C. 1104, 1111 n. 8 (1983), and Roemer v. Commissioner, 79 T.C. 398, 403–404 (1982), revd. 716 F.2d 693 (9th Cir.1983), which [100 T.C. 130] both invol......
  • Downey v. Comm'r of Internal Revenue, Docket No. 11120-89.
    • United States
    • United States Tax Court
    • July 31, 1991
    ...v. Commissioner, 87 T.C. 236 (1986), affd. 835 F.2d 67 (3d Cir. 1987) (deprivation of first amendment rights); Church v. Commissioner, 80 T.C. 1104, 1106 (1983) (jury award of compensatory damages in a libel suit); Seay v. Commissioner, 58 T.C. 32, 38 (1972) (compensation for personal embar......
  • Srivastava v. Commissioner, Docket No. 26605-95.
    • United States
    • United States Tax Court
    • October 6, 1998
    ...damages in a defamation action. See, e.g., Roemer v. 76 T.C.M. 648 Commissioner, supra at 700; Church v. Commissioner [Dec. 40,216], 80 T.C. 1104, 1110-1111 Section 265, however, disallows deductions for amounts that are allocable to tax-exempt income. Consequently, only the attorney's fees......
  • Request a trial to view additional results
50 cases
  • Miller v. Comm'r of Internal Revenue, Docket No. 21113-87.
    • United States
    • United States Tax Court
    • September 13, 1989
    ...Sec. 1.104-1(c), Income Tax Regs. Thus, section 104(a)(2) does not exclude only recoveries for physical injury. Church v. Commissioner, 80 T.C. 1104, 1106 (1983). Rather, the proper inquiry is whether damages have been recovered for personal injury. The very purpose of section 104(a)(2) is ......
  • Kovacs v. Comm'r of Internal Revenue, Nos. 5617–90 to 5620–90.
    • United States
    • United States Tax Court
    • February 24, 1993
    ...paid on an award of “damages” received on account of personal injury is excludable under section 104(a)(2). See Church v. Commissioner, 80 T.C. 1104, 1111 n. 8 (1983), and Roemer v. Commissioner, 79 T.C. 398, 403–404 (1982), revd. 716 F.2d 693 (9th Cir.1983), which [100 T.C. 130] both invol......
  • Downey v. Comm'r of Internal Revenue, Docket No. 11120-89.
    • United States
    • United States Tax Court
    • July 31, 1991
    ...v. Commissioner, 87 T.C. 236 (1986), affd. 835 F.2d 67 (3d Cir. 1987) (deprivation of first amendment rights); Church v. Commissioner, 80 T.C. 1104, 1106 (1983) (jury award of compensatory damages in a libel suit); Seay v. Commissioner, 58 T.C. 32, 38 (1972) (compensation for personal embar......
  • Srivastava v. Commissioner, Docket No. 26605-95.
    • United States
    • United States Tax Court
    • October 6, 1998
    ...damages in a defamation action. See, e.g., Roemer v. 76 T.C.M. 648 Commissioner, supra at 700; Church v. Commissioner [Dec. 40,216], 80 T.C. 1104, 1110-1111 Section 265, however, disallows deductions for amounts that are allocable to tax-exempt income. Consequently, only the attorney's fees......
  • Request a trial to view additional results

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