Seay v. Comm'r of Internal Revenue , Docket No. 2906-70.

CourtUnited States Tax Court
Writing for the CourtSIMPSON
Citation58 T.C. 32
PartiesDUDLEY G. SEAY AND SYBIL R. SEAY, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket NumberDocket No. 2906-70.
Decision Date10 April 1972

58 T.C. 32

DUDLEY G. SEAY AND SYBIL R. SEAY, PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2906-70.

United States Tax Court

Filed April 10, 1972.


[58 T.C. 32]

John M. Byers and Gerald J. Kahn, for the petitioners.

Denis J. Conlon and Robert F. Brunn, for the respondent.

P made claims against his former employer for breach of contract and personal injuries arising out of the termination of his employment. He received $105,000 in settlement of his claims. At the time of the settlement, both the attorney for P and the employer's attorney agreed in writing that $45,000 had been allocated to the personal injury claim. Held, P has shown that $45,000 of the payment was made on account of personal injuries and exempt from taxation under sec. 104(a)(2), I.R.C. 1954.

SIMPSON, Judge:

The respondent determined a deficiency of $26,066.60 in the petitioners' 1966 Federal income tax. The only issue for decision is whether $45,000 of a $105,000 payment, which one of the petitioners received in settlement of claims against his former employer, is excludable from gross income as damages received on account of personal injuries.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The petitioners, Dudley G. Seay and Sybil R. Seay, are husband and wife and maintained their residence in Minneapolis, Minn., at the

[58 T.C. 33]

time their petition was filed in this case. They filed their 1966 joint Federal income tax return with the district director of internal revenue, Milwaukee, Wis. Mr. Seay sometimes will be referred to as the petitioner.

From 1960 until the beginning of 1965, the petitioner was president of the Basic Products Corp. (Basic). In 1965, the petitioner undertook to acquire the financial backing necessary to purchase two divisions of that corporation. Mr. Dwayne Andreas, representing the Farmers Union Grain Terminal Association (GTA), learned of Mr. Seay's efforts to acquire such financing and contacted him. As a result of negotiations between Mr. Seay and Mr. Andreas, an agreement was reached under which GTA purchased the assets of the two divisions. The assets of one of these divisions were then leased by GTA to a corporation called the Froedtert Malt Corp. (Froedtert). This corporation was to be operated by the petitioner as president, Robert R. Ollman as vice president and treasurer, and Gordon D. Foster as executive vice president. According to oral employment contracts, their respective salaries were to be $60,000 per year, $30,000 per year, and $25,000 per year, and they were to share in the profits of the enterprise. The employment contracts were each for a period of 5 years and were renewable for a like period of time. In order to become president of this new corporation, Mr. Seay resigned his former position as president of Basic. The newspaper publicity regarding his resignation did not indicate that he had been given the opportunity to purchase two divisions of Basic and was somewhat embarrassing to him.

In 1966, a dispute arose between Mr. Seay, Mr. Ollman, and Mr. Foster (the Seay group) and the management of GTA. On May 25, 1966, the board of directors of Froedtert dismissed the petitioner, Mr. Ollman, and Mr. Foster and terminated their employment. The specific reason given for the petitioner's dismissal was that the corporate bylaws required the president to be a director and he was not a director. Each member of the Seay group was notified of the board's termination of his employment by a letter of May 27, 1966, and was therein informed that Mr. Thomas R. Gettelman would arrive on June 1, 1966, to assume control of the operations of Froedtert. Each letter concluded by stating that Mr. Max Kampelman had been retained to resolve the question of the management fee due to the Seay group. Acting on the advice of counsel, the Seay group refused to vacate the premises when Mr. Gettelman arrived.

On June 7, 1966, Froedtert filed a complaint in the Circuit Court of Milwaukee County, Wis., which recited the events of May 25, 1966, to June 1, 1966, alleged that the refusal of the Seay group to vacate the

[58 T.C. 34]

premises constituted trespass, and sought an order permanently restraining the members of the Seay group from occupying the premises, managing Froedtert, or causing that corporation to pay them any compensation for the period after June 1, 1966.

The filing of the complaint received publicity in the Milwaukee Journal, Milwaukee Sentinel, and The Wall Street Journal. Each article repeated the basic recitations and allegations of the complaint and referred to the petitioner's having been replaced as president of Basic in 1965. The petitioner believed that the publicity was a source of personal embarrassment and damaging to his personal reputation but, on the advice of counsel, he did not reply to the publicity. However, counsel was instructed to file a counterclaim for damages arising both from the adverse publicity and from the alleged breach of the oral employment contracts. The counterclaim was never prepared, as a settlement was signed on June 24, 1966. Previous to the settlement, the corporation had obtained a restraining order and a show cause order, and the Seay group had vacated the premises. After the suit was settled, the petitioner released a statement to the press claiming that the entire dispute had arisen over the question of how to operate Froedtert.

The negotiations leading to the settlement were mainly conducted by Mr. Orin Purintun, as counsel for the Seay group, and Mr. Max Kampelman, for both GTA and Froedtert. GTA was involved as it owned the assets of Froedtert and as the oral employment contracts were originally negotiated with it. Mr. M. W. Thatcher, the chief executive officer of GTA, and his assistant, Mr. Malusky, were given the authority by the board of directors of GTA to take the steps necessary to effect a settlement. In turn, Mr. Thatcher authorized Mr. Kampelman to settle the dispute. The only limitations that Mr. Thatcher placed on Mr. Kampelman's authority were that the settlement should not exceed $300,000 in cash plus 5 percent of the profits. The claims of the Seay group that there had been a breach of contract and that they had been damaged by the publicity were a part of the settlement negotiations between Mr. Purintun and Mr. Kampelman.

On June 23, 1966, a lump-sum settlement of $250,000 was accepted by Mr. Purintun on the understanding that it consisted of 1 year's salary for each member of the group, or $115,000, plus $45,000 for each member as damages caused by the newspaper publicity. On June 24, 1966, a settlement agreement was signed by the members of the Seay group, the new president of Froedtert, and a representative of GTA. The agreement stated that the sum of $250,000 had been paid to the Seay group, but did not allocate that sum in any way. On that same day, the suit by Froedtert was dismissed by mutual stipulation. On

[58 T.C. 35]

June 27, 1966, the proceeds of the settlement were distributed as follows:

+--------------------------------------------------+
                ¦Legal fees ¦$25,272.86¦
                +---------------------------------------+----------¦
                ¦Out-of-pocket expenses (Dudley G. Seay)¦560.00 ¦
                +---------------------------------------+----------¦
                ¦Dudley G. Seay: ¦ ¦
                +---------------------------------------+----------¦
                ¦Salary equivalent ¦60,000.00 ¦
                +---------------------------------------+----------¦
                ¦Additional ¦36,389.04 ¦
                +---------------------------------------+----------¦
                ¦Robert R. Ollman: ¦ ¦
                +---------------------------------------+----------¦
                ¦Salary equivalent ¦30,000.00 ¦
                +---------------------------------------+----------¦
                ¦Additional ¦36,389.05 ¦
                +---------------------------------------+----------¦
                ¦Gordon D. Foster: ¦ ¦
                +---------------------------------------+----------¦
                ¦Salary equivalent ¦25,000.00 ¦
                +---------------------------------------+----------¦
                ¦Additional ¦36,389.05 ¦
...

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81 practice notes
  • Rickel v. C.I.R., No. 89-1529
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • 3 Abril 1990
    ...835 F.2d 67, 70 (3d Cir.1987); Roemer v. Commissioner, 716 F.2d 693, 697 (9th Cir.1983); Threlkeld, 87 T.C. at 1297; Seay v. Commissioner, 58 T.C. 32, 40 (1972). See generally, L. Frolik, Federal Tax Aspects of Injury, Damage, and Loss 59 (1987). In addition, the Treasury regulations narrow......
  • United States v. Burke, No. 91-42
    • United States
    • United States Supreme Court
    • 26 Mayo 1992
    ...§ 104(a)(2) exclusion "makes no distinction between physical or emotional injuries"); 1972-2 C.B. 3, acquiescing in Seay v. Commissioner, 58 T.C. 32, 40 (1972) (holding that damages received for "personal embarrassment," "mental strain," and injury to "personal reputation" may be excluded u......
  • Miller v. Comm'r of Internal Revenue, Docket No. 21113-87.
    • United States
    • United States Tax Court
    • 13 Septiembre 1989
    ...Metzger v. Commissioner, 88 T.C. 834, 847 (1987), affd. without published opinion 845 F.2d 1013 (3d Cir. 1988); Seay v. Commissioner, 58 T.C. 32, 37 (1972). When, as in the instant case, a settlement agreement fails to specify the claim or claims for which payment is made, the intent of the......
  • Mayberry v. U.S., No. 4:95 CV 2463 DDN.
    • United States
    • United States District Courts. 8th Circuit. United States District Court (Eastern District of Missouri)
    • 11 Septiembre 1997
    ...States has agreed that the entire settlement distribution to plaintiff was in compensation for personal injury. 21. Seay v. Commissioner, 58 T.C. 32, 37, 1972 WL 2542 (1972) ("[T]he petitioner does not have to prove the validity of his claim; rather, he must show the nature of the claim whi......
  • Request a trial to view additional results
78 cases
  • Rickel v. C.I.R., No. 89-1529
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • 3 Abril 1990
    ...835 F.2d 67, 70 (3d Cir.1987); Roemer v. Commissioner, 716 F.2d 693, 697 (9th Cir.1983); Threlkeld, 87 T.C. at 1297; Seay v. Commissioner, 58 T.C. 32, 40 (1972). See generally, L. Frolik, Federal Tax Aspects of Injury, Damage, and Loss 59 (1987). In addition, the Treasury regulations narrow......
  • Mayberry v. U.S., No. 4:95 CV 2463 DDN.
    • United States
    • United States District Courts. 8th Circuit. United States District Court (Eastern District of Missouri)
    • 11 Septiembre 1997
    ...States has agreed that the entire settlement distribution to plaintiff was in compensation for personal injury. 21. Seay v. Commissioner, 58 T.C. 32, 37, 1972 WL 2542 (1972) ("[T]he petitioner does not have to prove the validity of his claim; rather, he must show the nature of the claim whi......
  • Downey v. Comm'r of Internal Revenue, Docket No. 11120-89.
    • United States
    • United States Tax Court
    • 31 Julio 1991
    ...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 embarrassment and injury to personal reputation). Moreover, courts have long held that injuries resulting f......
  • United States v. Burke, No. 91-42
    • United States
    • United States Supreme Court
    • 26 Mayo 1992
    ...§ 104(a)(2) exclusion "makes no distinction between physical or emotional injuries"); 1972-2 C.B. 3, acquiescing in Seay v. Commissioner, 58 T.C. 32, 40 (1972) (holding that damages received for "personal embarrassment," "mental strain," and injury to "personal reputation" may be excluded u......
  • Request a trial to view additional results

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