Espinoza v. Comm'r of Internal Revenue

• Decision Date: 28 March 2011
• Docket Number: No. 10–60778Summary Calendar.,10–60778Summary Calendar.
• Citation: 636 F.3d 747
• Parties: Isidra Elizabeth ESPINOZA, Petitioner–Appellant,v.COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

636 F.3d 747
111 Fair Empl.Prac.Cas. (BNA) 1662
107 A.F.T.R.2d 2011-1533
2011-1 USTC P 50,306

Isidra Elizabeth ESPINOZA, Petitioner–Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.

No. 10–60778Summary Calendar.

United States Court of Appeals, Fifth Circuit.

March 28, 2011.

[636 F.3d 748]

Isidra Elizabeth Espinoza, San Antonio, TX, pro se.John A. Nolet, Jonathan S. Cohen, John DiCicco, U.S. Dept. of Justice, Tax Div., App. Section, Clarissa C. Potter, IRS, Washington, DC, for CIR.Appeal from the Decision of the United States Tax Court.Before WIENER, PRADO, and OWEN, Circuit Judges.PRADO, Circuit Judge:

At issue in this appeal is whether a $50,000 lump-sum payment to “resolve and settle all differences, disputes, and controversies between the parties” in an action concerning various employment-related claims was excludable from a taxpayer's income under Internal Revenue Code § 104(a)(2). The Tax Court held that the taxpayer, Petitioner–Appellant Isidra Elizabeth Espinoza, had not met her burden of establishing that the payor, the Texas Health and Human Services Commission (“THHSC”), had agreed to pay this settlement amount on account of personal physical injuries or physical sickness such that Espinoza properly excluded the $50,000 from her 2006 federal income. Accordingly, the Tax Court determined that Espinoza was liable for $9,078 in tax deficiency as determined by the Respondent–Appellee Commissioner of the Internal Revenue Service (“Commissioner”). We agree and affirm the Tax Court's decision.

FACTS AND PROCEDURAL BACKGROUND

From 1990 to 2002, Espinoza was employed by THHSC, formerly known as the Texas Department of Human Services. In December 1997, Espinoza filed suit against THHSC for discrimination based on gender, religion, and national origin, as well as retaliation. Espinoza sought both compensatory and exemplary relief for actual damages, back pay, mental pain and anguish, and intentional infliction of emotional distress. In the fall of 2005, with Espinoza in poor health, Espinoza's husband discussed with Espinoza's personal injury lawyer, Jesus Villabolos, the possibility of approaching THHSC with a settlement offer. Calculating the total cost of Espinoza's

[636 F.3d 749]

medical bills for the physical and psychological ailments that had been caused or exacerbated by the workplace discrimination to be $50,000, Espinoza's husband asked Villabolos to convey this settlement offer to THHSC. During this discussion, Villabolos represented to Espinoza's husband that the settlement amount would not be taxable. Villabolos made the offer to settle for $50,000 to THHSC's attorney.

By January 27, 2006, THHSC and Espinoza had executed a release and settlement agreement. The agreement stated that the “agreement is entered into to resolve and settle all differences, disputes, and controversies between the parties, to compromise and settle doubtful and disputed claims, to avoid further litigation, and to facilitate peace.” THHSC agreed to pay a total amount of $50,000 “[i]n full and final settlement and compromise of all claims, but without admitting liability.” In 2006, Espinoza received the lump-sum payment along with a Form 1099–MISC from THHSC. On May 10, 2007, Espinoza filed her federal income tax return for tax year 2006. The return was prepared by a Certified Public Accountant (“CPA”). After being told by Espinoza's husband that the $50,000 settlement amount was for medical costs, the CPA informed the Espinozas that the settlement amount was tax exempt, and the CPA prepared the income tax return without including the settlement payment in Espinoza's gross income.

In August 2008, the Commissioner notified Espinoza of deficiency in her 2006 income tax. The Commissioner notified Espinoza that she owed an additional $9,078 for the $50,000 settlement amount she should have reported as income and an accuracy penalty of $1,816. On Espinoza's petition to the Tax Court seeking a redetermination of the Commissioner's determinations, the Tax Court upheld the Commissioner's determination that Espinoza's settlement proceeds were taxable, but reversed the Commissioner's determination that Espinoza should pay the accuracy penalty.¹ The Tax Court found that Espinoza had “failed to present objective and credible evidence that [THHSC] intended that any part of petitioner's settlement proceeds be allocated to her medical expenses” and that the “preponderance of the evidence is that the settlement was unallocated among multiple claims, many of which were not for physical injuries or physical sickness.” Thus, the Tax Court concluded that the settlement proceeds were taxable income for 2006. Espinoza timely appealed.

STANDARD OF REVIEW

We apply the same standard of review to Tax Court decisions that we apply to district court decisions. Green v. Comm'r, 507 F.3d 857, 866 (5th Cir.2007). We review findings of fact for clear error and issues of law de novo. Id. We review a Tax Court's finding that a taxpayer failed to establish that settlement proceeds were allocable to physical injury or physical sickness as a finding of fact, and thus we review for clear error. Id.

DISCUSSION

Gross income includes all income “from whatever...