Forste v. Commissioner, Docket No. 12393-00.
| Decision Date | 16 April 2003 |
| Docket Number | Docket No. 12393-00. |
| Citation | 85 T.C.M. 1146 |
| Parties | Norman L. and Catherine J. Forste v. Commissioner. |
| Court | U.S. Tax Court |
David M. Fogel and Robert R. Rubin, for the petitioners.
Steven J. Mopsick, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency of $11,576 in petitioners' Federal income tax and an accuracy-related penalty of $2,315 pursuant to section 6662(a)1 for 1996. Respondent concedes the accuracy-related penalty. The issue for decision is whether any of the money received by Mr. Forste in 1996 as a result of a settlement between him and his former employer was properly excluded from gross income under section 104(a)(2) as damages received on account of personal injuries or sickness.
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time they filed the petition, petitioners resided in Auburn, California.
Mr. Forste is a Korean War veteran who served in the Air Force. At some point after returning from Korea and being released from active duty, Mr. Forste joined the Air Force Reserves. Following a number of frightening experiences involving aircraft flights, Mr. Forste developed an acute fear of flying.
In August 1976, Mr. Forste began work in Los Angeles as a manager for the accounting firm of Deloitte, Haskins & Sells (DHS), which later became Deloitte & Touche. Mr. Forste was engaged in a national practice in the areas of government and education. His work required him to travel to DHS's offices throughout the United States. In May 1981, DHS promoted Mr. Forste from manager to director.2 His title was national director for government financial management systems. Following Mr. Forste's promotion to director, he signed a director agreement dated May 30, 1982.3 The director agreement was Mr. Forste's employment contract, and it provided for a term of employment that "shall extend from May 30, 1982 until the retirement or death of Director or the termination of such employment, in each case pursuant to the provisions of Section 4". Under section 4, four types of retirement were available to DHS's directors: (1) Mandatory retirement (age 62 with 15 years of service); (2) regular retirement (age 60 with 15 years of service); (3) early retirement (age 55 with 15 years of service); and (4) disability retirement (any age if the disability interfered with job performance). In addition, the agreement provided that directors could retire and the policy committee of DHS could require a director to retire at any time, and the director would receive retirement income in an amount and under such conditions as might be established by the policy committee in its discretion; and further, the policy committee could require a director to terminate employment, and the director could elect to terminate employment, at any time, and the director would have no right to retirement income except in the discretion of the policy committee.
DHS was aware of Mr. Forste's fear of flying when it hired him and insisted that it could work around this problem. DHS agreed that Mr. Forste would not be required to fly. Between August and November 1976, Mr. Forste flew twice as an employee of DHS. When scheduled to fly, he would have nightmares and wake up in a cold sweat nightly for approximately 2 weeks before his flight. In November 1976, Mr. Forste flew to Florida for DHS. Following an eventful return flight, he resolved never to fly again and informed one of the managing partners of his decision. He told the managing partner that if his inability to fly was a problem, he would seek other employment. DHS did not respond, and Mr. Forste continued working for DHS. Mr. Forste thereafter traveled by personal car or by train. His fear of flying and his choice of alternative modes of transportation did not interfere with his job performance, and he received only positive evaluations from DHS.
In the early part of 1983, a supervising partner in DHS told Mr. Forste that his inability to fly was an issue and that he had to fly or he would no longer be of any value to the firm. Because of the pressure to fly and the manner in which the issue was brought to Mr. Forste's attention, he experienced a great deal of stress, anguish, anxiety, fear, anger, and sleeplessness, as well as nightmares. He also experienced headaches which he treated with Tylenol and codeine. In March 1983, a psychiatrist examined Mr. Forste and diagnosed his fear of flying as an incurable form of "delayed stress syndrome". DHS was made aware of the psychiatrist's diagnosis and the possibility that Mr. Forste's condition was permanent.
In October 1983, DHS's managing partner told Mr. Forste that he had to fly by the end of the year or else leave the firm. In November 1983, Mr. Forste wrote a letter to DHS regarding his fear of flying, expressing his dissatisfaction with the firm's decision, and suggesting that he be granted a disability retirement. In December 1983, DHS restricted Mr. Forste's work area to northern California and limited his practice area to education. In February 1985, DHS told Mr. Forste of its decision that he had to leave the firm. DHS cited his fear of flying as a problem with which it could not cope. DHS initially offered Mr. Forste $30,000 in severance pay. He rejected that offer. Mr. Forste's annual salary was $69,000 in 1985.
Mr. Forste became very upset about DHS's decision, and he contemplated suicide. He engaged an attorney, who sent a letter to DHS dated March 11, 1985, raising a number of tort and nontort causes of action and seeking a settlement of the employment dispute. Those causes of action included breach of contract, misrepresentation, failure to accommodate Mr. Forste's disability, unlawful termination due to disability, and intentional or negligent infliction of emotional distress. The letter states with respect to potential causes of action:
Our law firm has advised Mr. Forste that he has substantial legal rights in his employment with Deloitte Haskins & Sells and that Deloitte Haskins & Sells has substantial legal obligations to Mr. Forste. A few of these rights are listed below.
1. We believe Mr. Forste has a cause of action against Deloitte Haskins & Sells for breach of contract. He came to your firm with the clear understanding that he could not fly in an airplane. Based upon that understanding, he gave his most productive years of his career and because of a change of thinking he is now put in a position where he will enter into the job market at an advanced age with far less attractiveness to a prospective employer.
2. We believe Mr. Forste has a cause of action against your firm for misrepresentation based upon the promise that his inability to fly in an airplane would not hinder his employment with Deloitte Haskins & Sells.
3. We believe if Mr. Forste is to be terminated, such termination should be based upon a certifiable material disability, to wit his fear of flying. We believe your firm is under the duty, pursuant to Federal law, to make all reasonable accomodations [sic] to provide for this disability. Failure to do this subjects your firm to substantial liability to Mr. Forste as well as to federal agencies.
4. We believe that Mr. Forste has a substantial cause of action for the intentional and/or negligent infliction of mental distress. Your firm has constantly subjected Mr. Forste and his family to fear of loss of job and security because of his inability to fly in an airplane.
5. We believe that the procedural provisions of the contract between your firm and Mr. Forste regarding termination of employment have not been satisfied and would have to be satisfied before Mr. Forste could be terminated.
Following DHS's receipt of this letter, it informed Mr. Forste that he would have to deal with Mike Cook, the chief operating officer or number two man in DHS. Mr. Forste wrote a letter to Mr. Cook and requested that he be given a disability retirement. DHS then contacted Mr. Forste and commenced negotiations for his termination. The negotiations occurred between Mr. Forste and his attorney and James R. Ladd. Mr. Ladd was the national personnel partner for DHS in New York and was its top human resources person.
Between May and August 1985, Mr. Forste and DHS exchanged numerous drafts (seven) of a proposed settlement agreement.4 On May 10, 1985, DHS proposed that Mr. Forste receive a regular retirement as if he were 60 years of age; i.e., Mr. Forste would receive $25,130 of retirement income per year. The proposal from DHS stated in relevant part:
As discussed with Jim Ladd, I request that I be allowed to retire as of June 1, 1985, under the following terms.
1. I will receive retirement income under the terms of Section 4(a) of my Director's Agreement as if I had worked with the firm until I had attained age 60. This will amount to $25,130 per year; * * *
2. I will receive additional payments through May 31, 1986 that, when combined with my retirement income, will equal my current rate of base salary.
* * * * * * *
10. In consideration of DH&S accepting the terms set forth in paragraphs 1 through 5, and when DH&S accepts these terms, I will forever release any and all rights, claims or causes of action I have or may have against DH&S (or against any of its partners, directors or employees) relating to, arising out of or based upon my employment by DH&S, my tenure as a director of DH&S, services performed by me in my capacity as an employee or director of DH&S, or the termination of my employment by or tenure as a director with DH&S, except the right to enforce the obligations of DH&S to me provided by this agreement.
This settlement offer was better than what Mr. Forste was entitled to, given his age. Mr. Forste did not accept DHS's proposal, and he instead made numerous handwritten changes to...
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